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The  Art  of 
Wall  Street  Investing 


BY 

John  Moody 

f  I 

Author  of 
"  The  Truth  About  the  Trusts,"  etc. 


Published  by 

The  Moody  Corporation 

35  Nassau  Street,  New  York 
19  0  6 


Copyright,  1906,  by 
JOHN  MOODY 
All  rights  reserved 


I  •  •    •  •    • 


THE    MOODY-BARTON    PRESS 


Preface 

ALTHOUGH  the  popular  impression  is 
probably  the  reverse,  it  is  certainly  a 
fact  that  a  greater  sum  of  money  is  annually 
lost  in  this  country  through  unwise  investment 
in  Wall  Street,  than  through  pure  speculation. 
While  fortunes  are  daily  jeopardized  and  dissi- 
pated through  speculation  in  stocks,  bonds, 
grain-futures  and  like  ventures,  yet  the  many 
sums,  large  and  small,  which  annually  leave 
the  pockets  of  actual  investors  are  far  greater 
in  amount.  Indeed,  I  would  almost  say  that 
the  losses  incurred  through  "unwise  Wall 
Street  investing"  are  easily  tenfold  the  losses 
occasioned  through  mere  speculation  on  the 
exchanges. 

And  furthermore,  the  losses  resulting  from 
unwise  investing  are  far  more  important  to  the 
community  at  large;  for  while  speculative 
losses  are  in  a  sense  anticipated,  the  losses 
through  mistaken  investments  are  usually  un- 
expected   and    unprepared    for.     Speculative 

iii 


42861  ii 


iv  PREFACE 

losses  often  represent  the  loss  of  money  easily 
gained,  either  through  former  speculations  or 
from  other  sources,  but  the  average  loss  of  the 
investing  public  is  generally  a  loss  of  hard- 
earned  or  industriously  accumulated  savings; 
and  therefor  such  losses  are  felt  more  deeply 
by  the  community. 

The  Art  of  Wall  Street  Investing  involves 
two  important  primary  principles.  The  first  is 
to  place  one's  principal  where  it  will  be  en- 
tirely secure,  and  the  second^  to  gain  as  large  a 
percentage  of  return  as  possible  without  in 
the  least  disturbing  or  lessening  the  security 
of  the  principal.  The  moment  the  status  of  the 
principal  is  changed  for  the  purpose  of  enhanc- 
ing the  rate  of  return,  the  transaction  ceases  to 
be  a  pure  investment  and  becomes  more  or  less 
of  a  speculation.  Thus,  analyzed  in  its  sim- 
plest form,  we  may  put  it  down  as  axiomatic 
that  only  those  are  legitimate  investments 
where  the  primary  motive  is  the  safe  securing 
of  one's  principal  and  the  rate  of  return  thereon 
is  looked  upon  as  secondary.  A  speculation, 
on  the  other  hand,  is  where  the  desire  for  large 
profit  is  so  strong  that  the  safety  of  the  prin- 
cipal becomes  in  effect  a  minor  consideration. 
That  is  to  say,  the  person  investing  or  specu- 
lating may  regard  his  principal  as  secure  but  is 


PREFACE  V 

willing  to  place  it  at  considerable  risk  in  order 
to  increase  his  profit.  The  securing  of  the 
principal,  therefor,  is  the  first  and  chief  matter 
to  be  considered  in  investing  money. 

Looked  upon  in  this  light,  it  will  be  seen  that 
the  matter  of  investing  money  wisely  is  a  most 
important  as  well  as  a  most  difficult  art,  and 
therefor  well  worthy  of  careful  examination. 
The  ideas  and  suggestions  embraced  in  the  fol- 
lowing pages  are  the  concrete  result  of  sixteen 
years'  experience  and  study  of  Wall  Street 
conditions  and  methods;  and  while  it  may  ap- 
pear to  some  that  the  writer  is  too  conserva- 
tive in  his  attitude  towards  investing  methods 
in  general,  yet  careful  thought  should  convince 
every  reader  that  it  is  the  part  of  safety  and 
prudence  to  be  securely  on  the  side  of  con- 
servatism in  Wall  Street  investing,  rather  than 
the  reverse. 

In  the  following  chapters  the  general  sub- 
ject of  Wall  Street  investing  is  treated  in  as 
practical  a  way  as  possible.  The  fundamental 
principles  of  investing  are  carefully  examined, 
and  their  importance  emphasized.  It  is  in- 
tended that  the  book  shall  not  be  merely  a 
treatise  on  the  abstract  or  theoretical  side  of 
investing,  nor  that  it  shall  merely  give  a  sur- 
face view  of  the  investment  field.    Rather  is  it 


VI  PREFACE 

intended  to  make  the  book  of  general  use  as  a 
practical  hand-book  or  guide  for  those  who 
wish  to  place  their  money  in  legitimate  corpo- 
rate enterprises  of  the  several  kinds,  through 
the  purchase  of  stocks  and  bonds.  Not  only 
are  the  different  classes  of  securities  them- 
selves described,  but  careful  explanations  are 
given  of  the  machinery  and  methods  of  invest- 
ing throughout  the  various  Wall  Street  chan- 
nels. 

In  the  general  arrangement  and  composition 
the  valuable  co-operation  of  Mr.  John  F. 
Hume,  author  of  a  book  now  long  out  of  print, 
entitled  "The  Art  of  Investing,"  is  hereby  pub- 
licly acknowledged. 

JOHN  MOODY 


CONTENTS 


Chapter  Page 

I.     Safety  and  Security 9 

II.  Bonds  and  What  They  Represent.  33 

III.  Stocks  and  What  They  Are 59 

IV.  Analyzing  Railroad  Securities 75 

V.     Industrials  and  Tractions 99 

VI.     Investment   vs.    Speculation 105 

VII.     "Get-Rich-Quick"     Schemes iii 

VIII.  Reorganizations  and  Syndicates.  .  125 

IX.  The  New  York  Stock  Exchange.  .  135 

X.  Wall  Street  Phrases  and  Methods.  153 


The  Art  of  Wall  Street  Investing 
I 

Safety  and  Security 

UNLESS  he  has  had  much  previous  ex- 
perience, the  prospective  investor  who 
wishes  to  put  his  money  at  work  through  Wall 
Street  channels,  will  be  confronted  at  the  outset 
with  the  questions  of  "safety"  and  "security." 
Knowing  only  more  or  less  definitely,  that  he 
ought  not  to  expect  a  return  of  more  than  four 
to  five  per  cent.,  if  he  wishes  to  invest  his 
money  securely,  he  naturally  seeks  more  ex- 
pert advice  from  a  banker,  broker  or  general 
dealer  in  investment  securities.  And  he  is  wise 
is  doing  this,  provided  he  exercises  good  judg- 
ment in  the  selection  of  the  broker  or  dealer. 
But  brokers  and  dealers  in  investment  securi- 
ties are,  of  course,  not  infallible;  their  judg- 
ment is  sometimes  biased,  and  they  may,  for 
one  reason  or  another,  give  unsound  advice. 
Hence  it  is  all  the  more  necessary  that  the 


10    ART  OF  WALL  STREET  INVESTING 

investor  should  inform  himself  regarding  the 
merits  of  a  given  security,  as  well  as  train  him- 
self in  the  art  of  analyzing  investments  in  gen- 
eral. 

The  truth  is,  that  while  there  are  certain 
fixed  rules  for  proper  guidance,  every  bond 
must  be  judged  by  itself  in  order  to  be  analyzed 
correctly.  For  instance,  a  man  may  be  advised 
to  invest  only  in  "first  mortgages,"  on  the 
hypothesis  that  by  putting  this  limitation  upon 
his  field  of  investment,  he  will  thereby  insure 
its  safety.  But  such  advice,  applied  broadly 
and  without  qualification,  is  essentially  un- 
sound. A  fourth,  fifth  or  tenth  mortgage  on 
some  properties  may  be  far  more  secure  than  a 
first  mortgage  on  others.  For  instance,  the 
Reading  Company  4s,  selling  at  104,  are  a  much 
safer  security  than  were  the  first  mortgage 
bonds  of  the  Centralia  &  Chester  RR,  issued 
in  1895,  altho  the  former  are  an  eighth  mort- 
gage on  parts  of  the  main-line  of  the  Reading 
system  and  were  originally  a  first  mortgage  on 
no  part  of  the  property.  Yet  they  are  well 
secured,  while  the  other  bond  defaulted  early 
in  its  life  and  its  holders  were  obliged  to  sacri- 
fice a  large  part  of  their  principal  in  the  re- 
organization which  followed  the  default.  Thus 
it  will  be  seen  that  to  merely  advise  the  in- 


SAFETY  AND  SECURITY  ii 

vestor    to    ccniinc    his    investments    to    first 
mortgages  may  be  most  misleading. 

Another  unsafe  method  of  judging  the  safety 
of  bonds,  is  to  assume  that  because  they  are 
secured  on  part  of  a  large  railroad  system  and 
"underlie"  one  or  more  issues  of  secondary 
bonds,  their  security  is  absolutely  assured. 
This,  like  the  former  theory,  contains  some 
vital  flaws,  and  while  it  holds  good  in  the 
majority  of  instances,  if  followed  in  others, 
brings  very  disastrous  results.  Many  large 
and  important  railroad  corporations  absorb 
tributary  or  competing  lines  under  one  plan  or 
another,  but  they  do  not  always  guaranteed 
the  securities  of  these  lines.  Bond  issues  are 
frequently  "assumed"  by  a  controlling  com- 
pany, according  to  statements  circulated,  but 
unless  they  have  been  specifically  guaranteed, 
either  by  the  acquiring  corporation  or  by  some 
other  equally  responsible  concern,  it  does  not 
necessarily  follow  that  the  credit  of  the  latter 
is  back  of  the  security  at  all.  The  acquired 
line  may  turn  out  an  unprofitable  and  losing 
investment,  with  the  result  that  the  larger  or 
controlling  line  will  want  to  either  unload  its 
burden  or  scale  down  the  obligations  of  the 
branch  to  a  sum  approximately  less  than  the 
latter  is  currently  earning.     There  are  many 


12     ART   OF  WALL  STREET  INVESTING   . 

methods  whereby  this  can  be  done,  as  has  been 
proven  many  times.  It  is  vital,  therefor,  that 
the  investor  should  base  his  entire  judgment 
of  value  on  the  property  itself,  regardless  of 
the  parent  company,  unless  indeed  the  latter 
has  absolutely  assumed  and  guaranteed  the 
principal  and  interest  of  the  bond. 

A  third  error,  v^^hich  is  very  common,  is  to 
assume  that  because  a  bond  is  listed  on  one  or 
more  of  the  stock  exchanges,  it  is  therefor 
safer  or  in  better  standing  than  otherwise. 
Such  a  notion  is  entirely  unsound,  as  there  are 
far  more  bonds  of  the  highest  grade  and  of  the 
best  security  traded  in  on  the  various  markets 
outside  of  the  exchanges  themselves.  The 
chief  advantage  of  a  security  being  listed  on 
an  exchange  is  that  it  thereby  secures  a  fixed 
quotation,  but  the  fact  of  its  being  listed  does 
not  bear  upon  its  safety  in  any  way.  While  it 
is  true  that  many  of  the  best  secured  bonds  and 
stocks  are  listed  on  the  exchanges,  it  is  also 
true  that  many  of  the  least  secure  are  listed  as 
well. 

In  contemplating  an  investment  in  a  given 
securit}^  each  case  should  be  judged  on  its 
own  merits.  In  the  case  of  a  railroad  bond^  it 
is  not  the  question  of  whether  the  issue  is  a 
first   mortgage    or   a   blanket   mortgage,   but 


SAFETY  AND  SECURITY  13 

whether  the  value  of  the  property  on  which  it 
is  secured  is  sufficiently  in  excess  of  the 
amount  of  the  mortgage,  and  whether  the  in- 
come from  the  property  is  sufficiently  in  excess 
of  the  amount  required  for  meeting  the  interest 
on  the  bonds  and  all  prior  obligations.  And  in 
defining  value,  we  mean,  of  course,  permanent 
earning  power,  for  it  is  chiefly  the  permanent 
or  growing  earning  power  that  makes  the 
value.  For  instance,  the  New  York,  Nev/ 
Haven  and  Hartford  railroad  lines,  between 
New  York  and  Boston,  are  bonded  and  capital- 
ized for  an  amount  far  in  excess  of  the  cost  of 
replacing  the  actual  movable  property  of  the 
company.  But  there  are  other  assets  besides 
rails  and  equipment  which  m.ake  railroad 
property  valuable.  These  are  its  location,  its 
exclusive  rights  of  way  and  terminal  sites  or 
privileges.  It  is  from  these  that  flow  its  chief 
earning  power.  The  six  hundred  odd  miles  of 
railroad  in  the  New  Jersey  Central  system 
may  not  represent  much  more  movable  prop- 
erty than  a  like  mileage  of  railroad  in  Mexico, 
and  may  not  have  originally  cost  much  more 
to  build.  But  the  vast  difference  in  value  will 
be  found  in  the  location,  in  the  value  of  the 
land,  a  value  which  has  been  created  by  the 
influx  or  growth  of  population.    This  is  such 


14    ART   OF  WALL   STREET   INVESTING 

an  important  factor  that  the  value  of  a  prop- 
erty at  once  appreciates  if  a  tendency  towards 
more  rapid  growth  appears,  while  it  tends  to 
fall  in  all  cases  where  the  contrary  tendency 
develops.* 

The  rights  of  way  and  terminal  sites  and 
privileges  are  therefor  the  first  features  to 
bear  in  mind  in  analyzing  the  earning  pov/er, 
or  value.  And  it  must  also  be  borne  in  mind 
that  it  is  the  permanent,  or  average,  earning 
power  rather  than  the  possible  temporary  in- 
com^e  which  is  to  be  considered.  By  perma- 
nency is  meant  a  matter  of  generations,  rather 
than  years.  Most  railroad  bonds,  nov/adays,  run 
from  40  to  100  years,  and  the  investor  must 
naturally  be  assured  that  there  is  not  likely  to 
be  any  real  depreciation  in  the  property,  if 
properly  maintained,  in  the  generations  to 
come.  His  first  thought,  then,  must  be  to 
ascertain  if  the  influx  of  population  around  and 
along  the  lines  of  the  property  promises  to 
continue  indefinitely;  and  at  the  same  time 
he  must  determine  whether  the  value  of  this 
and  the  surrounding  land  is  such  that  the  cre- 
ation of  a  rival  right  of  way  is  out  of  question. 

*(This  effect  of  population  on  land  values  is  brought  out 
most  clearly  and  scientifically  in  a  book  recently  written  by 
Richard  M.  Hurd,  President  of  the  Mortgage  Bond  Co.,  New 
York,  entitled  "Principleg  of  City  Land  Values."  Copies 
supplied  by  The  Moody  Corporation,  $1.50  each.) 


SAFETY  AND  SECURITY  15 

In  other  words,  his  fundamental  asset  (the 
site)  must  be  practically  exclusive,  for  it  is  the 
condition  of  exclusiveness  that  gives  it  most 
of  its  value. 

Having  assured  himself  as  to  this,  his  next 
care  will  be  to  see  that  the  probable  average 
earning  capacity  of  the  property  in  the  poor- 
est times  is  well  in  excess  (50  per  cent,  at 
least)  of  all  requirements  for  interest  on  this 
mortgage  and  all  prior  charges,  as  well  as  for 
full  maintenance  of  the  property  in  every  re- 
spect. The  investigation  of  this  phase  of  the 
enterprise  is  frequently  a  difficult  one,  as  re- 
ports and  income  accounts  are  often  so  mis- 
leading in  arrangement  and  make-up  that  the 
careless  investor  is  frequently  deceived  by  an 
elaborate  display  of  figures  which  may  mean 
very  little.  In  Chapter  IV,  "Analyzing  Rail- 
road Securities,"  this  subject  of  railroad  ac- 
counting is  referred  to  in  full  detail. 

But  even  though  the  investor  has  thoroughly 
informed  himself  regarding  the  above  char- 
acteristics, there  are  many  other  uncertainties 
which  are  to  be  avoided  or  overcome.  How- 
ever, if  he  has  been  careful  to  see  that  the 
conditions  described  above  are  all  present  in 
a  given  investment,  his  chances  of  losing  his 
money  will  be  reduced  to  a  minimum.    If,  on 


i6    ART   OF  WALL  STREET  INVESTING 

the  other  hand,  he  neglects  these  precautions, 
and  adopts  other  rules  for  analyzing  the  secur- 
ity or  puts  his  trust  in  the  "say-so"  of  this  or 
that  authority,  then  he  stands  in  great  danger 
of  sooner  or  later  coming  to  grief,  as  will  be 
shov/n  in  the  following  pages. 

Many  years  ago  the  careless  legislation  of 
many  of  the  States  permitted  railroad  and 
other  corporations  to  decide  for  themselves, 
absolutely  v/ithout  restriction,  the  amounts  of 
obligations  they  might  put  out,  and  therefor 
it  was  no  wonder  that  the  privilege  was 
abused,  and  the  making  of  shares  and  bonds, 
the  latter  represented  to  be  amply  secured  by 
mortgage  liens,  were  carried  to  criminal  ex- 
cess.   One  illustration  will  suffice. 

The  old  Arkansas  Central  Railway  com- 
pany, located  in  the  State  of  Arkansas,  built 
only  forty-eight  miles  of  its  projected  road. 
The  road  was  of  narrow  gauge,  with  very  light 
iron,  and  in  every  way  cheaply  constructed.  It 
cost  less  than  ten  thousand  dollars  per  mile, 
including  equipment.  As  has  been  the  case 
with  most  companies  building  railways  in  new 
territory,  help  in  its  behalf  was  asked  from  the 
communities  to  be  benefited,  and  their  bonds, 
amounting  to  nearly  half  a  million  dollars, 
were  given  it  by  the  counties,  cities,  etc.  Under 


SAFETY  AND  SECURITY  17 

a  statute  providing  for  aid  to  railroads  when 
their  beds  could  be  utilized  for  levee  purposes, 
the  company  got  $160,000  of  State  bonds. 
Under  another  statute  it  got,  as  a  loan  from 
the  State,  the  latter's  bonds  to  the  amount  of 
$1,350,000,  which  were  to  be  a  first  lien  on  the 
property.  After  such  abundant  assistance,  it 
would  have  appeared  hardly  necessary  for  the 
company  to  put  out  obligations  of  its  own. 
However,  it  proceeded  to  market  and  issue  its 
ov/n  debentures  to  the  amount  of  $2,500,000, 
of  which  $1,200,000  purported  to  be  secured  by 
first  mortgage,  a  representation  that,  for  rea- 
sons already  stated,  was  not  correct.  In  addi- 
tion, a  considerable  amount  of  stock  certifi- 
cates were  issued.  Altogether,  nearly  $5,000,- 
000  of  paper  v/as  put  out  and  negotiated  on  the 
basis  of  forty-eight  miles  of  narrow-gauge 
road.  But  this  proved  to  be  insufficient.  The 
road,  for  non-payment  of  interest  on  its  bonds, 
soon  passed  into  the  hands  of  a  receiver,  who 
found  it  in  such  an  unfinished  state,  that  with 
the  court's  permission,  he  issued  a  considerable 
amount  of  his  own  certificates  to  provide  for 
necessary  repairs  and  betterments.  Then  the 
road,  the  product  of  such  an  outlay,  was  sold 
at  public  auction  and  brought  the  magnificent 
sum  of  $40,000,  which  was  paid,  not  in  cash, 


i8    ART   OF  WALL  STREET  INVESTING 

but  in  receiver's  certificates  that  had  been  pur- 
chased at  a  great  discount  from  their  face ! 

Twenty  or  thirty  years  ago,  nearly  all  first- 
class  securities,  outside  of  "governments"  and 
"municipals,"  were  steam  railroad  bonds  and 
stocks.  But  we  now  have  stocks  and  bonds 
upon  the  market  representing  nearly  all  con- 
ceivable kinds  of  property,  industrial  and 
manufacturing  companies,  telegraphs,  tele- 
phones, gas,  electric  light  and  traction  compa- 
nies, water-works,  bridges,  oil  and  gas  wells, 
factories  and  mills  of  every  description,  patent 
rights  of  all  sorts,  steamboat  lines,  apartment 
houses,  realty  enterprises,  and  even  ceme- 
teries. And  not  only  are  properties  of  many 
kinds  used  to  issue  bonds  on,  but  many  kinds 
of  bonds  are  often  issued  upon  the  same  prop- 
erties. Thus  we  find  among  our  railroads  and 
other  corporations  not  only  first,  second  and 
third  mortgages,  but  income  bonds,  debentures, 
convertible  bonds,  consolidated  bonds,  redemp- 
tion bonds,  renewal  bonds,  terminal  bonds, 
divisional  bonds,  sinking  fund  bonds,  "blanket- 
mortgage"  bonds,  collateral  trust  bonds,  equip- 
ment bonds,  participating  bonds,  joint  bonds, 
and  bonds  ad  nauseam  until  they  lap  and  over- 
lap in  seemingly  endless  complication.  Not 
that  merely,  but  one  issue  of  bonds  is  some- 


SAFETY  AND  SECURITY  19 

times  made  the  basis  of  other  issues.  Indeed, 
one  of  the  money-making  devices  of  the  time 
is  the  formation  of  companies  that  issue  their 
bonds  on  the  security  of  the  other  people's 
bonds  that  they  have  purchased,  either  yield- 
ing a  higher  rate  of  interest  or  obtained  at 
lower  prices  than  they  expect  to  realize  for 
their  issues.  There  seems,  in  fact,  to  be  no 
limit  to  the  production  of  securities  that  are 
spread  before  capitalists  and  investors.  There 
never  was  a  time  when  it  was  so  easy  to  invest 
money  and  to  lose  it.  Of  the  securities  that 
are  offered  with  first  rate  recommendations,  it 
is  probable  that  about  one-third  are  actually 
good,  one-third  have  some  value,  and  one-third 
are  practically  worthless.  Hence  the  very  nat- 
ural inference  that  whatever  art  there  may  be 
in  the  matter  of  investing  is  to  be  exercised 
chiefly  in  the  avoidance  of  unv/orthy  offerings, 
and  it  is  to  that  point  first  that  a  profitable  dis- 
cussion must  be  mainly  directed. 

For  the  condition  of  things  described,  the 
laws  of  some  of  our  States  in  giving  corpora- 
tions almost  limitless  power  to  issue  negotiable 
paper,  as  well  as  in  permitting  all  sorts  of  com- 
panies to  incorporate  themselves,  are,  undoubt- 
edly, very  largely  to  blame.  Our  banks  are 
closely  watched  and  very  properly  restrained 


20    ART   OF  WALL  STREET  INVESTING 

from  taking  people's  money  on  false  pretenses ; 
but  is  it  much  better  for  industrial  and  other 
corporations  to  take  it  by  means  of  legalized 
fictitious  evidences  of  value?  Banks  and  insur- 
ance companies  are  by  no  means  the  only  insti- 
tutions that  need  watching.  One  of  the  re- 
forms that  v/ould  seem  to  be  worth  considera- 
tion is  legislation  prohibitory  of  the  creation 
by  companies  existing  by  authority  of  law  of 
stocks  and  securities  not  representing  cash 
actually  paid  into  their  treasuries,  or  proprie- 
tary interests  whose  values  are  to  be  deter- 
mined by  disinterested  parties.  Texas  has  in- 
corporated substantially  such  a  provision  in 
her  constitution.  Her  example  should  be  fol- 
lowed by  all  other  commonwealths. 

But  the  security  behind  or  beneath  the  de- 
benture or  other  paper  obligatory  is  not  the 
only  thing  to  be  looked  into  by  the  investor. 
Even  the  form  of  the  document  may  be  import- 
ant. A  case  in  point,  inasmuch  as  it  shows  how 
the  preparation  of  an  undertaking  for  the  pay- 
ment of  money  may  change  its  apparent  value, 
would  seem  in  this  connection  to  be  appropri- 
ately quoted.  Some  years  ago  certain  town- 
ships in  the  State  of  Missouri  were  desirous  of 
aiding  the  construction  of  railroads  with  their 
credit.     The  State  Legislature,  to  that  end, 


SAFETY  AND  SECURITY  21 

passed  an  act  authorizing  the  issue  and  sale  of 
bonds  obligatory  upon  them ;  but  it  was  stipu- 
lated— a  very  singular  provision — that,  instead 
of  being  put  out  by  the  townships,  the  bonds 
should  be  executed  by  the  officials  of  the  coun- 
ties in  which  they  were  located.  Accordingly 
debentures  aggregating  several  million  dollars 
were  thus  prepared  and  disposed  of.  The  bonds 
bore  the  seals  of  the  counties  and  the  signa- 
tures of  their  officials.  On  the  back  and  at  the 
top  of  each  signature,  in  large  letters,  were  the 
words  "county  bond."  The  instrument  began 
with  the  recital,  in  the  usual  form,  that  it  was 
issued  by  the  county,  but  farther  on,  and  in  the 
smallest  type  employed,  came  the  statement 
that  it  was  executed  for  and  in  behalf  of  a  cer- 
tain township,  which  alone  was  to  be  responsi- 
ble for  its  payment.  These  bonds  were  exten- 
sively advertised  as  "county  bonds,"  and  prob- 
ably in  most  instances,  certainly  in  many,  were 
sold  as  such,  and  it  was  not  until  purchasers 
parted  with  their  money,  that  they  discovered 
that,  instead  of  getting  the  bonds  of  wjell 
known  and  wealthy  counties,  they  had  secured 
only  the  obligations  of  townships  they  had 
never  heard  of  before.  It  was  then  manifest 
enough  that  they  had  been  made  the  victims  ot 
a  piece  of  very  sharp  and  very  shabby  practice. 


22    ART   OF  WALL  STREET   INVESTING 

In  ,nany  cases  the  buyers  of  bonds  and  other 
securities  learn,  when  it  is  too  late,  that  their 
purchases,  owing  to  some  obscure  and  appar- 
ently innocent  passage  that  had  been  over- 
looked or  disregarded,  are  very  different  from 
what  they  thought  they  were  getting.  How 
often  have  careless  investors  that  supposed 
they  were  purchasing  undertakings  that 
would  be  good  for  long  terms  of  years,  and 
probably  paid  premiums  to  obtain  them,  ascer- 
tained at  the  end  of  comparatively  short  inter- 
vals that  they  were  forced  to  accept  in  pay- 
ment the  amounts  nominated  in  the  bonds  in 
consequence  of  unnoticed  clauses  giving  their 
makers  power  to  redeem  their  option!  The 
lesson  of  such  cases  is  obvious  enough.  It  is 
that  no  one  should  buy  a  bond  or  stock  without 
first  having  carefully  read  the  certificate.  This 
may  seem  like  an  unnecessary  warning ;  but  in 
truth  it  is  a  most  material  one.  Thousands  and 
thousands  of  dollars  have  been  lost  by  the  neg- 
lect of  this  simple  precaution.  "I  didn't  read 
the  bond"  is  the  explanation  that  has  again 
and  again  been  offered  when  time  has  disclosed 
a  different  investment  from  the  one  intended 
to  be  paid  for.  The  fact  is  that  comparatively 
few  unprofessional  bond  and  stock  purchasers 
ever  carefully  examine  the  instruments  they 


SAFETY  AND  SECURITY  23 

acquire.  They  look  at  the  headings,  those 
parts  that  are  in  big  letters,  and  take  the  rest 
for  granted.  It  is  a  most  unwise  practice. 
Unless  you  are  previously  familiar  with  the 
document  in  all  its  parts,  don't  fail  to  read  it 
before  you  buy.  Read  it  all,  the  little  type  as 
well  as  the  big  type,  the  indorsements,  the 
coupons,  and  all.  Don't  take  somebody's  else 
word  for  it.  Examine  the  seal,  the  signatures, 
and  even  the  embellishments.  Something  may 
be  disclosed  that  will  change  your  mind  and 
save  your  money. 

But  if  there  are  tricks  in  the  making  of 
securities,  even  more  are  to  be  apprehended 
in  the  selling  of  them,  and  should  be  guarded 
against  with  corresponding  diligence.  It  is  a 
notable  fact  that  no  poor  securities  are  ever 
offered.  They  are  always  good  so  long  as  they 
are  on  the  market.  It  is  only  after  they  have 
been  purchased  that  they  prove  to  be  worth- 
less. Interest  has  never  been  known  to  fail 
on  bonds  that  are  seeking  investors,  although 
default  has  sometimes  followed  very  closely 
on  the  sale  of  the  last  obligations.  Indeed,  it 
is  no  secret  that  interest  is  sometimes  paid  out 
of  the  proceeds  of  the  bonds,  the  purchasers  in 
this  way  getting  a  portion  of  their  own  money 
back  while  the  process  of  marketing  them  is 


24    ART   OF  WALL  STREET  INVESTING 

going  forward,  although  such  a  thing  has  sel- 
dom been  known  to  happen  after  the  entire 
issue  has  been  disposed  of.  The  advertise- 
ments of  some  bond-sellers  are  often  marvel- 
lous productions.  No  such  securities  as  they 
have  to  oif er  have  ever  been  on  the  market 
before.  They  are  absolutely  safe;  they  pay 
extra  rates  of  interest,  etc.,  etc.  The  wonder 
is  that  with  so  much  capital  seeking  invest- 
ment, it  is  found  necessary  to  advertise  such 
perfections  at  all!  In  such  cases  it  is  hardly 
necessary  to  say  that  the  only  safe  rule  for 
investors  is  to  find  other  uses  for  their  money, 
however  strong  the  temptation  may  be. 

A  common  expedient  of  bond-m.akers  and 
bond-merchants  is  to  fortify  their  issues  with 
the  favorable  opinions  of  eminent  lawyers. 
This  is  particularly  the  case  when  the  obliga- 
tions of  municipalities  or  of  companies  that 
are  dependent  upon  contracts  with  municipal- 
ities are  offered,  some  municipalities  having  in 
the  past  shov/n  an  unpleasant  disposition  to  go 
back  on  their  undertakings.  No  exceptions 
can  be  taken  to  the  practice  referred  to,  as 
counsel  learned  in  the  law  should  in  such 
cases  always  be  consulted;  but  the  writer  has 
to  say  that  he  has  never  yet  known  a  security 
so  poor  that  a  lawyer's  opinion  could  not  be 


SAFETY  AND  SECURITY  25 

had  to  back  it.     Such  testimonials  should  be 
taken  for  what  they  are  worth,  and  no  more. 

When  so  many  seductive  baits  are  offered; 
so  many  nets  and  traps,  contrived  and  con- 
structed by  clever  brains  and  cunning  fingers, 
are  spread  for  the  capture  of  those  having 
money,  is  it  surprising  that  the  careless  and 
credulous  are  victimized,  and  even  that  the 
sagacious  and  prudent  should  sometimes  be 
taken  in?  Nevertheless,  for  the  losses  they 
have  sustained,  investors,  as  a  rule,  have  them- 
selves chiefly  to  blame.  The  mistakes  made,  in 
nine  cases  out  of  ten,  have  been  the  purchase 
of  "cheap"  securities.  The  hope  of  realizing 
a  little  more  than  ordinary  interest,  by  buying 
paper  at  a  discount,  has  proved  to  be  the  rock 
on  which  unnumbered  capitalists  have  split. 
In  addition  to  their  money's  worth,  they  have 
endeavored  to  get  something  for  nothing,  with 
the  result  of  most  generally  getting  nothing 
for  something. .  It  is  remarkable  how  blind  are 
people,  ordinarily  sagacious  enough  to  make 
money,  to  the  fact  that  property  cannot  pay  a 
revenue  beyond  its  producing  capacity.  For 
instance,  how  can  a  trolley  company,  whose 
line  is  v/holly  or  mainly  built  from  the  proceeds 
of  mortgage  bonds,  sell  them  at  a  heavy  dis- 
count, besides  allov/ing  large  commissions  for 


26    ART   OF  WALL  STREET  INVESTING 

the  selling,  and  then  pay  both  this  interest 
and  dividends  on  a  large  issue  of  watered 
stock?  Or  how  can  a  poor  agriculturist,  occu- 
pying a  half-improved  farm  out  on  the  frontier, 
with  a  family  to  support  and  grain  selling 
barely  above  the  cost  of  production,  pay  ten 
or  twelve  per  cent,  upon  the  capital  with  which 
he  does  business? 

By  what  rule  or  rules  is  the  investor  to  gov- 
ern himself.  No  formula  can  guarantee  him 
absolute  safety.  One  thing,  however,  he  can 
properly  count  upon,  viz.,  that  he  must  expect 
to  pay  a  fair  price  for  a  good  security — one 
that  will  return  him  no  more  than  a  moderate 
interest  on  his  money.  If  he  wants  to  specu- 
late and  is  willing  to  take  risks,  that  is  another 
thing.  He  can  then  look  for  bargains.  The 
capitalist  or  investor  who  sends  his  money  into 
a  new  section,  or  puts  it  into  a  new  mechanical 
process,  or  a  new  constructive  enterprise,  may 
or  may  not  make  a  hit,  but  for  the  ordinary  and 
conservative  operator,  the  conditions  of  the 
commercial  and  financial  world  give  warning 
that  only  reasonable  profits  are  to  be  looked 
for.  The  first  and  main  thing  to  be  studied  is 
safety.  And  yet  there  is  such  a  thing  as  going 
too  far  in  the  matter  of  prudence.  The  in- 
vestor may  pay  too  dearly  for  safety.    There 


SAFETY  AND  SECURITY  27 

are  securities  which,  compared  with  others 
that  are  to  be  had,  sell  at  prices  much  above 
their  real  worth.  The  reason  is  that  everybody 
knows  them  to  be  good,  and  investors  who 
don't  want  to  take  the  trouble  to  investigate, 
or  are  afraid  to  trust  both  their  own  judgment 
and  the  counsels  of  their  friends,  are  willing  to 
pay  extra  prices  for  them.  But  there  are 
plenty  of  others  that  may  be  had  at  lower  fig- 
ures, which  are  just  as  good.  There  is  no 
reason  in  the  world  why  the  investor  should 
not  safely  invest  at  a  rate  that  will  generally 
yield  him  4  per  cent,  to  5  per  cent,  interest,  and 
have  his  investment  as  secure  as  any  property 
can  be  under  human  supervision.  As  here- 
tofor  stated,  with  the  creation  of  new  enter- 
prises and  properties,  and  the  development  of 
old  ones,  new  securities  are  constantly  appear- 
ing in  this  country  and  a  fair  share  of  them 
ought  to  be  good.  Indeed,  our  securities  ought 
to  be  the  best  in  the  world.  The  sure  and  rapid 
growth  of  our  resources  supplies  a  reliable  sup- 
port as  long  as  fair  intelligence  and  common 
honesty  attend  their  production.  The  only 
thing  is  to  choose  with  discretion,  so  many 
doubtful  and  even  fraudulent  issues  appearing 
at  the  same  time;  but  no  more  judgment  is 


28    ART   OF  WALL  STREET  INVESTING 

really  demanded  than  in  purchasing  lands  or 
cattle. 

Two  common  and  often  fatal  mistakes 
should  be  avoided.  One  is  in  relying  solely 
upon  the  advice  of  another.  No  one  compe- 
tent to  form  an  opinion  for  himself  should  put 
his  pecuniary  interests  unreservedly  in  the 
keeping  of  another.  Such  absolute  confidence 
invites  betrayal.  By  far  the  greater  number  of 
losses  to  investors  have  been  in  securities  pur- 
chased exclusively  on  the  recommendation  of 
interested  outside  parties.  While  it  is  well  to 
get  the  opinion  of  a  reputable  broker,  the  pur- 
chaser should  investigate  for  himself.  The 
other  mistake  is  to  uniformly  give  preference 
to  listed  securities.  As  pointed  out  at  the  be- 
ginning of  this  article,  many  persons  seem  to 
think  that  stocks  and  bonds  must  have  a  value 
if  they  are  quoted  at  some  stock  exchange,  for- 
getting how  many  fancies  have  been  bal- 
looned until  they  have  burst  at  such  places. 
On  the  contrary,  such  a  position  is  likely  to  ex- 
pose them  to  manipulation  for  purely  specula- 
tive purposes.  Stock-exchange  quotations  are 
often  unsafe  guides  to  buyers.  They  represent 
not  merely  the  value  of  the  property  but  also 
the  pitch  of  speculation  at  the  time.  When 
securities    are    converted    into    foot-balls    for 


SAFETY  AND  SECURITY  29 

gamblers  to  play  with,  they  are  pretty  certain 
to  be  too  high  or  too  low.  The  main  advantage 
they  can  have  is  a  readier  marketability  in  case 
of  an  urgent  need  to  sell ;  but  it  is  at  the  times 
when  such  need  is  likely  to  exist  that  they  are 
pretty  certain  to  be  at  the  lower  point.  No 
speculative  help  can  long  take  the  place  of  real 
value.  Securities,  in  the  long  run,  must  stand 
upon  their  merits,  and  purchasers  have  merely 
to  follow  business  principles  as  taught  by  the 
canons  of  common  sense. 

In  seeking  investments,  and  especially  long 
time  investments^  there  are  several  things  to 
be  taken  into  account.  There  is  not  only  the 
question  of  the  kind  of  security  to  purchase, 
but  the  question  of  the  time  of  purchase.  There 
are  opportunities  to  be  looked  for  as  well  as 
pitfalls  to  be  shunned.  It  is  during  periods  and 
seasons  of  depression,  when  securities  are 
forced  upon  the  market,  often  to  be  sacrificed 
— and  such  opportunities  are  certain  to  come 
if  waited  for  long  enough — that  the  shrewd 
investor  finds  his  richest  harvest.  That,  how- 
ever, cannot  be  said  of  the  ordinary  investor. 
He  usually  buys  when  securities  are  up  and 
confidence  is  unimpaired,  and  becoming  fright- 
ened as  the  market  values  go  down,  sells  when 
^hey  are  at  the  bottom,  and  holds  his  mon^v 


30    ART   OF  WALL   STREET  INVESTING 

to  reinvest  in  something  else  no  better,  and 
probably  not  as  good,  when  the  tide  has 
turned.  As  a  rule,  the  best  time  to  invest  is 
when  others  are  unloading.  In  money  matters 
it  is  never  safe  to  follow  "the  crowd."  Nor  is 
it  safe,  (which  is  little  more  than  the  expres- 
sion of  the  same  idea  in  another  form)  to  pur- 
chase a  security  when  it  is  on  the  "boom."  A 
peculiarity  of  our  money  market,  conservative 
as  it  is  popularly  supposed  to  be,  is  that  it  is 
constantly  changing  its  favorites.  Its  offer- 
ings come  in  waves.  Its  dealings  at  one  time 
may  be  chiefly  in  railways,  at  another  in  indus- 
trial obligations,  and  at  another  the  excitement 
may  run  to  mining  shares  or  mortgages  on 
ranches  and  real  estate.  For  the  time  all  pro- 
fessional brokers  and  bond  and  share  sellers 
urge  their  customers  to  adopt  the  popular 
issue,  of  which,  as  the  result  of  the  increased 
dem.and,  there  is  almost  certain  to  be  exces- 
sive, if  not  fraudulent  production.  To  yield 
to  the  pressure  of  such  a  time  is  always  risky. 
Old  and  tried  securities,  like  old  friends,  are 
likely  to  be  the  truest  and  best. 

One  thing  the  investor  would  do  well  never 
to  forget,  is  that  there  are  always  plenty  of 
good  securities  in  the  market.  No  one  with 
money  need  ever  fear  that  others  will  get  all 


SAFETY  AND  SECURITY  31 

the  solid  investments,  and,  in  the  apprehen- 
sion that  there  will  not  be  enough  of  that  sort 
to  go  around,  put  up  with  an  inferior  article. 
Don't  let  him  choose  what  is  not  altogether 
satisfactory,  under  the  impression  that  nothing 
else  as  good  or  better  will  offer.  If  he  does  so, 
sooner  or  later  he  will  regret  it.  Something 
good  always  comes  to  him  who  waits  with 
money  in  his  hand. 

Another  thing  of  a  precautionary  nature  it  is 
well  enough  for  the  investor  to  do,  and  that  is 
to  scatter  his  purchases.  The  old  adage  about 
not  putting  all  the  eggs  in  one  basket  applies 
with  peculiar  force  to  investments.  The  tenden- 
cy with  those  having  moderate  sums  to  invest, 
and  who  need  to  be  the  most  circumspect,  is 
to  make  up  their  minds  in  favor  of  a  single  line 
of  securities  and  put  everything  there.  Of 
course,  a  failure  in  that  quarter  is  particularly 
disastrous.  The  writer  knew  a  man,  some 
years  ago,  who  decided  in  favor  of  municipal 
obligations,  saying  that  he  had  satisfied  him- 
self that,  on  the  whole,  there  was  nothing  else 
so  reliable.  Accordingly  he  put  his  entire 
available  means  into  them.  But  practicing 
abundant  precaution,  as  he  supposed,  he 
divided  his  money  equally  among  municipal 
issues  ,of  Illinois,  Missouri  and  Kansas,  they 


32    ART  OF  WALL  STREET  INVESTING 

having  the  most  paper  at  that  time  on  the 
market.  He  thought  he  v/as  entirely  safe  as  to 
principal.  But  soon  after  a  wave  of  repudiation 
sentiment  swept  over  that  part  of  the  country, 
and  every  one  of  his  bonds  were  left  in  default. 
It  is  well  enough  to  scatter  in  kind  as  well  as 
in  locality. 

Against  the  theory  of  scattering  investments, 
men  sometimes  quote  the  advice  of  Andrew 
Carnegie  to  "put  all  your  eggs  in  one  basket, 
and  v^atch  the  basket."  This  principle,  how- 
ever, while  sound  enough  for  the  expert  or 
specialist  who  is  in  a  situation  to  at  all  times 
see  and  watch  the  basket,  is  not  applicable  to 
the  average  ordinary  investor.  The  average 
investor  simply  cannot  "watch  the  basket"  in 
the  way  implied  by  Mr.  Carnegie,  and  there- 
for it  is  a  safe  principle  for  him  under  all  ordi- 
nary circumstances,  to  limit  his  chances  of  loss 
to  the  greatest  possible  extent  through  a  wide 
and  judicious  distribution  of  his  capital. 


II 

Bonds  and  Wliat  they  Represent 

T5  ONDS  are  issued  on  all  kinds  of  property 
'^  and  are  usually  secured  by  a  mortgage 
of  some  kind.  There  are,  however,  certain 
classes  of  bonds,  such  as  "governments"  and 
"municipals,"  the  principal  of  which  is  secured 
entirely  in  other  ways.  It  will  be  of  interest 
and  profit  to  briefly  point  out  the  earmarks  of 
these  different  classes  of  bonds. 

Bonds  are  usually  issued  in  denominations 
of  $1,000  each,  though  sometimes  issued  for  a 
larger  or  smaller  amount.  Some  bonds  bear 
coupons  and  some  are  what  are  known  as 
registered  bonds.  The  interest  on  the  latter  is 
always  paid  directly  to  the  registered  owner 
by  check,  in  the  same  manner  that  dividends 
are  paid. 

A  first  mortgage  bond  is  always  secured  by 
a  deed  of  trust,  and  directly  covers  the  prop- 
erty on  which  it  is  secured,  without  being  sub- 
ject to  any  other  lien.     There  may  be  other 

33 


34     ART  OF  WALL  STREET  INVESTING 

bond  issues  secured  on  the  same  property,  but 
their  lien  is  entirely  subsequent  to  the  first 
mortgage.  Because  a  bond  is  a  "first  mort- 
gage" one  should  not  necessarily  assume  that 
it  is  a  "gilt-edged"  security.  True,  it  is  bound 
to  be  better  than  any  other  bonds  secured  on 
the  same  property,  but  the  property  itself  may 
not  be  worth  the  amount  of  the  mortgage,  or 
the  business  may  not  be  earning  enough  to 
pay  the  interest  as  it  falls  due. 

A  second  mortgage  bond^  is,  as  its  name 
indicates,  always  secured  subsidiary  to  the 
prior,  or  first  mortgage.  If  the  first  mortgage 
completely  covers  the  value  of  the  property, 
then  of  course,  the  second  mortgage  has  an 
inferior  standing  only.  But  many  first  mort- 
gages amount  to  only  a  portion  of  the  value  of 
a  property,  and  in  these  cases  a  second  mort- 
gage is  frequently  well  secured  and  attractive 
as  an  investment.  To  illustrate:  A  property 
worth  $10,000,000  and  earning  $800,000  per 
year  may  have  issued  a  first  mortgage  amount- 
ing to  $1,000,000,  and  carrying  an  interest 
charge  of  $60,000  per  year.  Such  a  first  mort- 
gage bond  would  be  regarded  as  high  grade. 
The  company  may  then  have  issued  a  second 
mortgage  amounting  to  $2,000,000,  and  carry- 
ing an  interest  charge  of  $120,000  per  annum. 


BONDS  AND  WHAT  THEY  REPRESENT  35 

In  this  case  the  second  mortgage  bond  would 
be  high  grade  also,  as  the  aggregate  amount  of 
both  mortgages  would  be  but  $3,000,000  on  a 
property  valued  at  $10,000,000,  and  the  total 
interest  charge  of  $180,000  would  leave  a  sur- 
plus, (based  on  earnings  of  $800,000  per  year) 
aggregating  $620,000,  or  more  than  3^  times 
the  interest  charge  itself.  On  the  other  hand, 
if  a  property,  the  value  of  which  was  but 
$4,000,000,  with  annual  earnings  of  but  $240,- 
000,  should  issue  first  and  second  mortgages  of 
the  character  and  amounts  mentioned  above, 
not  only  would  the  second  mortgage  bond  be 
of  doubtful  quality,  but  the  first  mortgage 
itself  would  be  regarded  as  very  far  from 
"high-grade." 

Third,  fourth  and  fifth  mortgages,  etc.,  are, 
as  their  names  indicate,  secured  subsequent  to 
the  several  preceding  issues  and  require  no 
separate  comment,  except  that  the  mere  fact 
of  their  being  subsidiary  to  several  issues  does 
not  of  itself  make  them  inferior  in  value. 
Other  things  being  equal,  the  title  of  a  bond 
signifies  very  little.  The  fifth  mortgage  bond 
of  the  old  New  York  &  Erie  Railroad  (now  as- 
sumed by  the  Erie  Railroad  system)  and  of 
which  there  are  outstanding  $700,000,  are  not 
any  the  less  valuable  because  they  are  secured 


36      ART  OF  WALL  STREET  INVESTING 

as  a  "fifth"  mortgage  only,  but  on  the  other 
hand  they  are  decidedly  high-grade  in  respect 
to  security,  as  they  are  a  lien  (subject  to  four 
prior  mortgages  aggregating  $13,500,000)  on 
446  miles  of  the  Erie  main  lines.  As  these  main 
lines  are  easily  worth  ten  times  the  amount 
of  all  five  mortgages,  it  will  be  seen  at  a  glance 
that  they  are  all  securities  of  a  most  desirable 
kind. 

A  consolidated  mortgage  bond  is  generally 
created  as  a  result  of  a  reorganization,  a  read- 
justment of  finances,  or  for  the  purpose  of  pro- 
viding nev7  capital  where  a  property  is  already 
mortgaged  to  some  extent,  and  a  second  or 
third  mortgage  would  not  be  well  enough 
secured  to  warrant  a  ready  sale.  To  cite  an 
instance,  let  us  take  the  First  Consolidated  5% 
bonds  of  the  Southern  Railway  Company. 
This  Company  was  formed  in  1894  as  suc- 
cessor to  a  large  number  of  other  railroad 
corporations  operating  throughout  the  South. 
It  was  necessary  to  finance  the  new  company 
with  liberal  capital,  to  spend  a  large  amount 
of  money  on  the  properties,  and  in  these  and 
other  ways  to  increase  the  earning  power  of 
the  company.  As  the  properties  were  already 
mortgaged  in  various  ways  for  more  than 
$60,000,000,  it  was  not  found  practicable  fot 


BONDS  AND  WHAT  THEY  REPRESENT  37 

the  company  to  issue  an  independent  mort- 
gage. They  therefore  authorized  a  "consoH- 
dated"  mortgage,  one  of  the  cardinal  features 
being  the  authorization  of  a  very  large  issue, 
of  which  a  sufficient  amount  were  held  in 
reserve  to  retire  the  various  prior  divisional 
mortgages  as  they  matured.  This  consolidated 
issue  runs  100  years,  and  as  the  many  divi- 
sional and  prior  bonds  mature  at  different  dates 
and  some  very  quickly,  it  follows  that  the 
"consolidated"  bonds  grow  in  security  and 
value  as  the  old  issues  are  cancelled.  In  this 
particular  case  every  prior  issue  will  be  retired 
by  1938  and  most  of  them  much  sooner,  where- 
upon the  consolidated  issue  will  become  a  first 
mortgage. 

A  general  mortgage  bond  is  of  the  same  class 
as  a  consolidated  mortgage.  This  is  some- 
times called  a  "blanket"  mortgage,  and  is  fre- 
quently issued  when  there  is  but  a  single  first 
mortgage  on  the  property.  It  is  sometimes 
partly  secured  by  second  mortgage  and  partly 
by  first  mortgage,  but  usually  it  is  merely  sub- 
sequent to  two  or  more  first  and  sometimes 
even  consolidated  or  less  well  secured  liens. 
When  this  is  the  case  a  sufiicient  amount  is 
generally  reserved  to  take  care  of  the  other 
bonds   as   they  mature.     In   some   cases   the 


38      ART  OF  WALL  STREET  INVESTING 

prior  liens,  or  portions  of  them,  are  exchanged 
for  the  "generals"  on  a  mutually  satisfactory 
basis. 

A  prior  lien  bond  is  not  necessarily  a  bond 
of  prior  security  at  all,  except  in  a  qualified 
sense.  The  term  "prior  lien"  as  applied  to 
railroad  bonds  nowadays,  connotes  something 
entirely  different  from  what  would  naturally 
be  supposed.  The  Erie  Railroad  "prior  lien" 
fours,  for  instance,  are  simply  prior  to  the  "gen- 
eral lien"  fours,  and  both  are  part  of  an  issue  of 
a  first  consolidated  mortgage  which  was  author- 
ized at  the  time  of  the  reorganization  in  1895 
to  provide  new  capital,  take  care  of  old  mort- 
gages, etc.  The  prior  lien  issue,  therefore,  sim- 
ply has  preference  over  the  general  lien  por- 
tion of  the  same  mortgage.  The  Northern 
Pacific,  Baltimore  and  Ohio,  and  a  number  of 
other  large  railroad  companies  have  adopted  a 
similar  device. 

A  debenture  bond  is  not  a  mortgage,  but 
simply  a  promissory  note,  or  promise  to  pay. 
It  is  usually  issued  in  the  same  form  as  other 
bonds,  sometimes  carrying  coupons  and  some- 
times appearing  in  registered  form.  While 
both  principal  and  interest  are  an  obligation  of 
the  company  issuing  the  bond,  yet  in  the  case 
of  a  default  the  holder  cannot  foreclose  as  he 


BONDS  AND  WHAT  THEY  REPRESENT  39 

can  in  the  case  of  a  mortgage  bond.  In  this 
respect  the  debenture  is  in  very  much  the 
same  position  as  a  cumulative  preferred  stock, 
with  the  important  exception  that  the  latter 
usually  carries  a  voting  power,  while  the 
former  does  not.  But  debenture  bonds,  like  all 
the  rest,  get  their  investment  status  largely 
through  the  character  of  the  corporation  issu- 
ing them.  Some  debenture  issues,  like  those 
on  the  Chicago  &  Northwestern  system,  are  in 
such  high  standing  (because  of  the  vastness 
and  general  solidity  of  the  company)  as  to  be 
quoted  at  a  very  high  premium,  the  fives  sell- 
ing at  over  115 — while  others  are  in  the  cate- 
gory of  third-rate  stocks. 

A  collateral  trust  bond  is  an  indirect  mort- 
gage on  a  piece  of  property,  made  through  the 
deposit  with  a  trustee  of  other  securities  which 
are  usually  directly  secured.  Sometimes,  how- 
ever, the  collateral  so  deposited  consists  of 
both  stocks  and  bonds,  and  in  some  cases,  of 
stocks  only.  Like  other  kinds  of  bonds,  there 
are  "all  sorts  and  conditions"  of  collateral 
issues,  some  being  secured  by  one  collateral 
only  and  others  being  secured  by  a  hetero- 
geneous variety  of  good,  bad  and  indifferent 
stocks  and  bonds.  In  some  cases  bonds  are 
secured  partly   by  deposit   of   collateral   and 


40     ART  OF  WALL  STREET  INVESTING 

partly  by  mortgage  on  some  property.  In  such 
instances  they  are  described  as  "mortgage- 
collateral  trust  bonds,"  etc. 

A  convertible  bond  is  an  issue  which  carries 
a  right  or  privilege  for  conversion  into  some 
other  issue  of  bonds  or  stocks.  There  are 
many  kinds  of  convertible  bonds,  and  they 
carry  convertible  clauses  for  many  and  diverse 
reasons.  Thus,  United  States  Steel  Corpora- 
tion second  fives  were  convertible  into  pre- 
ferred stock  at  par;  Erie  Railroad  four  per 
cent,  convertibles  are  convertible  into  common 
stock  on  the  basis  of  $200  in  stock  for  $100  in 
bonds  before  April  i,  1915;  Baltimore  &  Ohio 
convertible  debentures  are  convertible  into 
common  stock  at  par  on  any  interest  day,  etc. 
Sometimes  these  clauses  are  inserted  in  mort- 
gages to  give  them  a  speculative  value;  in 
other  cases  to  provide  for  the  retirement  of 
the  debt  by  its  conversion  into  stock.  Usually 
the  act  of  converting  is  optional  with  the 
holder. 

A  joint  bond  is  one  issued  or  assumed  by 
two  or  more  corporations.  Thus,  the  Great 
Northern-Northern  Pacific  joint  collateral 
trust  fours,  secured  by  deposit  of  Chicago,  Bur- 
lington &  Quincy  Railroad  stock  are  the  joint 
obligation  of  the  two  controlling  companies. 


BONDS  AND  WHAT  THEY  REPRESENT  41 

There  are  not  a  great  many  issues  of  such 
joint-bonds,  although  there  are  many  cases 
where  independent  bond  issues  are  jointly 
guaranteed,  either  by  two  or  more  separate 
corporations. 

A  guaranteed  bond  is  one  the  payment  of 
which  is  specifically  "guaranteed"  by  endorse- 
ment   or    otherwise    by    another    corporation. 
There  are  many  guaranteed  bond  issues  in  the 
railroad  field,  carrying  guarantees  o£  various 
kinds.   In  some  cases  the  interest  only  is  guar- 
anteed; in  others,  both  the  principal  and  inter- 
est.   Guarantees  often  come  about  as  the  result 
of  a  consolidation,  lease  or  absorption  of  some 
kind,   altho   there   are   many  cases   in  which 
bonds  are  guaranteed  for  other  reasons.    The 
Delaware,   Lackawanna   &   Western   Railway 
specifically    guarantees   the    Morris    &    Essex 
refunding   s%%   bonds.     But   the   Morris   & 
Essex  is  a  constituent  part  of  the  Delaware, 
Lackawanna  &  Western  system,  and  the  bonds 
would  be  equally  as  valuable  without  the  guar- 
antee as  they  are  with  it.    The  guarantee,  how- 
ever, makes  them  a  direct  obligation  of  the 
Delaware,  Lackawanna  &  Western  Railv/ay. 
There  are  many  guaranteed  issues,  which  are, 
of  course,  materially  improved  by  their  guaran- 
tee, and  which  without  it  would  not  only  be 


42      ART  OF  WALL  STREET  INVESTING 

unattractive,  but  would  be  entirely  unsalable, 
for  the  reason  that  the  property  on  which  they 
are  directly  secured  is  not  valuable  enough  in 
itself  or  has  not  the  necessary  earning  power. 
It  must  not  be  assumed,  however,  that  the 
mere  formal  guarantee  gives  the  bond  its 
value.  This  latter  depends  entirely  upon  the 
standing  and  financial  strength  of  the  guar- 
antor. Thus,  a  bond  issue  guaranteed  by  the 
New  York  Central  system  will  have  a  far  bet- 
ter standing  than  one  guaranteed  by  a  com- 
pany like  the  Denver  &  Southwestern,  the 
standing  of  which  has  been  of  a  more  or  less 
uncertain  and  speculative  nature. 

Investors  in  guaranteed  bonds  should  exam- 
ine their  security  very  closely  to  ascertain 
whether  the  guarantee  can  be  abrogated  in 
any  way,  and  whether  it  actually  covers  both 
principal  and  interest.  If  the  guaranteeing 
company  itself  seems  likely  to  ever  repudiate 
the  bond,  its  entire  value  will  then,  of  course, 
revert  back  to  the  standing  of  the  mortgage 
itself,  and  in  any  event,  this  latter  should  be 
investigated  with  care.  The  guarantee  of  a 
bond  is  usually  embraced  in  the  phraseology 
of  the  bond  itself,  or  else  is  specifically  stated 
by  the  actual  endorsement  of  the  guarantor. 


BONDS  AND  WHAT  THEY  REPRESENT  43 

An  assumed  bond  is  in  some  respects  similar 
to  a  guaranteed  bond,  being  an  issue,  the  pay- 
ment of  which,  both  principal  and  interest,  is 
"assumed'*  by  the  controlling  company.  The 
effect  is  in  some  sense  the  same  as  a  guarantee 
and  the  bond  becomes,  as  a  result,  a  direct 
obligation  of  the  assuming  corporation.  There 
are  many  hundreds  of  "assumed"  bonds  dealt 
in  in  Wall  Street,  of  every  kind  and  description. 
Great  care  should  be  taken,  however,  in  exam- 
ining a  so-called  assumed  bond.  Many  large 
railroad  corporations  have  acquired  control  of 
other  properties  without  actually  assuming 
their  obligations.  Frequently  the  acquiring 
company,  for  strategic  or  other  reasons,  volun- 
tarily takes  care  of  these  obligations,  without 
being  legally  obligated  to  do  so.  But  unless  a 
bond  issue  has  been  definitely  and  formally 
assumed  by  the  controlling  company,  its  stand- 
ing as  an  investment  must  depend  chiefly  on 
the  actual  property  itself  and  not  on  the  stand- 
ing of  the  controlling  corporation.  Instances 
of  assumed  bonds  are  such  as  the  Kentucky 
Central;  Atlantic,  Knoxville  &  Northern  and 
the  Evansville,  Henderson  &  Nashville  issues 
in  the  Louisville  &  Nashville  system.  The 
payment  of  both  principal  and  interest  of  these 
issues  has  been  made  an  obligation  of  the  con- 


44      ART  OF  WALL  STREET  INVESTING 

trolling  company.  On  the  same  system  we 
find  several  mortgages  of  the  Nashville,  Chat- 
tanooga &  St.  Louis  Railway  which  have  not 
been  "assumed"  at  all.  These  issues  stand 
entirely  on  their  own  merits,  and  are  an  obliga- 
tion of  the  Nashville,  Chattanooga  &  St.  Louis 
Railway  only,  the  latter  being  controlled 
through  stock  ownership,  by  the  Louisville  & 
Nashville  Railroad. 

A  divisional  bond  is  usually  an  obligation  of 
a  large  railroad  which  is  secured  on  some  spe- 
cific division  of  the  property.  On  the  Chicago, 
Milwaukee  &  St.  Paul  Railway  all  the  bond 
issues,  outside  of  the  general  mortgage,  are 
divisional  liens.  Thus,  the  Iowa  &  Dakota 
Division  7s  are  a  direct  obligation,  but  secured 
by  mortgage  on  the  division  extending  from 
Algoma,  Iowa,  to  Chamberlain,  South  Dakota, 
consisting  of  355  miles.  The  Chicago  &  Lake 
Superior  Division  first  5s  are  a  direct  obliga- 
tion, but  secured  by  direct  mortgage  on  75 
miles  of  road  extending  from  Rockland,  Illinois, 
to  Portage  City,  Michigan.  The  cardinal  dis- 
tinction between  a  divisional  and  an  assumed 
bond  is  that  the  former  is  a  direct  obligation 
and  is  usually  issued  by  the  main  corporation, 
while  the  latter  is  (or  originally  was)  the  obli- 
gation of  a  subsidiary  corporation,  the  owner- 


BONDS  AND  WHAT  THEY  REPRESENT  45 
ship  or  control  of  the  stock  or  property  of 
which  has  been  acquired,  or  is  possessed  by 
the  main  company.  Assumed  bonds  are  some- 
times spoken  of  as  divisional  issues,  and  in  a 
broad  sense  they  are,  but  the  specific  meaning 
of  the  term  is  as  explained  above. 

An  income  bond  is  one  on  which  the  pay- 
ment of  the  interest  is  dependent  on  income. 
That  is  to  say,  while  the  principal  is  a  mort- 
gage and  legally  must  be  taken  care  of  at 
maturity,  the  interest  rate  is  not  a  "fixed 
charge,"  and  no  foreclosure  proceedings  can 
be  instituted  in  case  the  interest  is  not  paid. 
The  payment  of  the  latter  is  entirely  dependent 
on  the  earnings  of  the  company,  it  being  gen- 
erally agreed  that  if  the  interest  is  earned  it 
shall  be  paid;  otherwise,  not.  There  are  sev- 
eral classes  of  income  bonds.  Some  are  not 
a  mortgage.  These  are  usually  known  as  "de- 
benture incomes."  Others  bear  a  cumulative 
clause  which  provides  that  interest  when  un- 
paid, shall  accrue,  and  all  accrued  interest  be 
paid  or  satisfied  before  the  current  interest  is 
paid.  These  are  known  as  cumulative  income 
bonds.  Still  others  are  convertible  into  securi- 
ties of  another  class,  such  as  preferred  stock, 
and  are  known  as  convertible  incomes.  Others 
have  preference  over  inferior  issues  and  are 


46     ART  OF  WALL  STREET  INVESTING 

known  as  preference  incomes.  Thus  on  the 
Central  of  Georgia  Railv/ay  there  are  issues  of 
first,  second  and  third  incomes,  all  carrying  the 
right  to  5%  interest  per  annum,  when  earned. 
In  this  instance  5%  must  be  paid  on  the  firsts 
before  the  seconds  receive  anything,  and  the 
seconds  must  of  course  receive  their  5%  before 
the  thirds  come  in  for  any  interest.  If  enough 
is  earned  to  pay  the  full  am.ount  on  the  firsts, 
but  not  enough  for  the  full  amount  on  the 
seconds,  then  the  latter  usually  receive  what- 
ever amount  of  the  divisible  income  is  left. 
This  may  amount  to  i^o  or  35^%  or  4%,  being 
dependent  on  what  the  road  may  be  currently 
earning. 

It  does  not  follow,  however,  that  interest  is 
always  paid  on  income  bonds,  even  when  the 
property  earns  it.  One  frequently  hears  the 
remark,  that  such  and  such  a  company  is 
"showing"  the  full  interest  on  its  incomes  or 
the  full  dividend  on  its  preferred  shares. 
"Showing"  is  not  necessarily  paying,  and  pay- 
ments depend  not  merely  on  the  earnings,  but 
also  on  the  judgment  of  the  management  as  to 
whether  it  is  wise  to  make  the  payments.  Some 
managements  are  far  more  conservative  in  this 
respect  than  others,  and  the  most  far-seeing 
and  cautious  men,  who  handle  the  finances  of 


BONDS  AND  WHAT  THEY  REPRESENT  47 

a  large  property,  will  generally  "go  slow"  in 
the  matter  of  paying  out  money  on  incomes 
and  dividends  unless  the  company  is  earning  a 
considerable  surplus  over  the  amount  required 
for  the  payment,  or  has  already  accumulated  a 
tangible  surplus  from  earnings  to  fall  back 
upon. 

A  sinking-fund  mortgage  is  one  which  car- 
ries a  provision  setting  aside  a  portion  of  earn- 
ings year  by  year  for  the  purpose  of  retiring 
the  bonds  at  or  before  maturity.  There  are 
many  kinds  of  sinking-fund  clauses  in  bonds 
and  they  act  in  several  different  ways.  The 
best  known  form  is  a  provision  requiring  the 
company  to  deposit  with  the  trustee  period- 
ically a  certain  sum  of  money,  sometimes  a  per- 
centage of  the  gross  or  net  earnings,  some- 
times a  percentage  of  the  outstanding  issue, 
and  sometimes  simply  a  fixed  sum  of  money 
each  year ;  the  trustee  then  either  calling  in  by 
lot  a  sufficient  number  of  the  issue  to  exhaust 
the  amount  of  money  he  has  received,  or,  if 
more  are  offered  at  the  callable  price  (this 
price  is  usually  a  premium  figure,  102,  105,  no, 
etc.),  then  buying  the  bonds  in  the  open  market 
at  the  lowest  prices  offered.  The  bonds  so 
acquired  are  then  cancelled  and  thus  the  issue 
is  gradually  reduced.    Other  forms  of  sinking- 


48      ART  OF  WALL  STREET  INVESTING 

funds  are  where  the  bonds  so  acquired  by  the 
trustee  are  "kept  alive,"  the  interest  which  is 
paid  thereon  being  added  to  the  fund  and  used 
for  the  purpose  of  buying  still  more  bonds. 
Still  other  funds  require  that  the  bond  issue 
itself  be  allowed  to  run  until  maturity  and 
that  the  money  set  aside  in  the  fund  be  in- 
vested in  other  securities,  and  thus  the  whole 
fund  is  held  intact  until  the  entire  bond  issue 
actually  matures. 

There  are  a  great  many  "sinking-fund" 
bonds  in  existence,  but  in  the  railroad  invest- 
ment field,  they  are  not  as  popular  nowadays 
as  in  former  times.  The  permanent  investor 
does  not  like  a  sinking-fund  which  may  result 
in  disturbing  his  investment  at  any  time,  even 
if  he  does  receive  a  little  premium,  and  this  is 
especially  true  of  savings  banks  and  large  cor- 
porate investors  like  insurance  companies, 
large  estates,  etc.  Furthermore,  in  the  case  of 
a  bond  which  is  subject  to  call,  an  artificial 
value  is  created;  it  will  not  sell  much  above 
the  callable  price,  for  the  reason  that  it  is  call- 
able at  any  time.  On  the  other  hand,  if  there 
is  but  little  market  for  the  bonds  an  artificial 
demand  is  created  at  the  time  of  each  sinking* 
fund  purchase,  and  thus  its  attractions  as  an 
investment  purchase  are  seriously  interfered 


BONDS  AND  WHAT  THEY  REPRESENT  49 

with.     In  the  matter  of  municipal  securities, 
however,  the  sinking-fund  is  far  more  logical 
and  useful,  and  particularly  is  it  necessary  in 
bonds  which  are  issued  for  the  construction  of 
public  utilities  such  as  water,  electric  light  and 
gas  plants,  which  (where  owned  by  municipal- 
ities) are  operated  at  approximate  cost  and  are 
not  supposed  to  set  aside  surplus  earnings  in 
other  ways  to  cover  depreciation,  expansions 
and  improvements.     This  is  also  true  of  the 
more   speculative   classes   of   bonds,   such   as 
those  on  public  service  corporations  in  private 
hands,  industrial  enterprises,  etc.     Such  can- 
not, as  a  rule,  have  too  much  safe-guarding  of 
this  nature.     Railway  industries  of  all  kinds 
which  have  not  had  the  opportunity  of  demon- 
strating their  permanency  or  soundness  over 
long  periods  of  time  should  always  carry  sink- 
ing-funds in  their  bond  issues.    This  is  particu- 
larly applicable  to  industrial  enterprises,  the 
property  of  which  constantly  tends  to  depre- 
ciate.   The  great  United  States  Steel  Corpora- 
tion   carries    many    kinds    of    sinking-funds, 
aggregating  in  total  amount  nearly  $35,000,000 
per  annum,  which  at  the  present  time  is  equal 
to  more  than  20%  of  the  annual  net  income  of 
all  the  plants.    Bonds  on  coal  mines  and  other 
mining  properties  also  usually  carry  sinking- 


50     ART  OF  WALL  STREET  INVESTING 

funds.  In  the  case  of  the  former  the  proviso 
usually  is  that  a  certain  amount  (often  2  or 
3  cents)  be  set  aside  with  every  ton  of  coal 
mined,  the  accumulations  being  used  in  the 
usual  ways  for  the  retirement  periodically  of 
the  issue. 

An  extended  bond  is  an  issue  which  has 
matured  and  by  agreement  with  the  owners 
has  been  extended  for  a  further  period,  instead 
of  a  new  issue  being  created  to  take  its  place. 
Often  bonds  are  extended  for  a  few  years  only, 
but  sometimes  the  extension  reaches  on  over 
several  decades.  Usually,  in  the  case  of  rail- 
road issues,  the  rate  of  interest  is  reduced  at 
the  time  of  the  extension  and  sometimes  new 
bonds  of  the  same  mortgage,  but  with  sheets 
of  coupons  at  reduced  rates,  are  exchanged  for 
the  old  ones.  There  have  been  instances 
where  the  old  bonds  have  been  retained  and 
stamped  with  the  "extension  clause,"  and  new 
sheets  of  coupons  supplied  separately. 

There  are  several  issues  of  extended  bonds 
now  running  as  divisional  liens  on  the  Erie 
Railroad  system.  These  are  the  New  York  & 
Erie  first,  second,  third,  fourth  and  fifth  mort- 
gages. Originally  issued  in  the  '40s  and  '50s 
at  7%,  they  all  matured  in  the  '70s  and  *8os, 
and  have  been  extended  for  forty  to  fifty  years 


BONDS  AND  WHAT  THEY  REPRESENT  51 

more  at  4,  4^  and  s/o.  When  they  finally 
mature  again  they  will  this  time  be  retired, 
and  bonds  of  the  Erie  Railroad  general  lien 
issue,  now  held  in  reserve,  will  take  their 
places. 

An  underlying  bond  is  a  general  term 
describing  any  issue  which  precedes  or  is  prior 
in  mortgage  security  to  some  subsequent  issue. 
When  a  bond  is  spoken  of  as  underlying,  it  is 
generally  so  referred  to  in  connection  with 
some  general  or  junior  issue,  which  may  or 
may  not  provide  for  retiring  this  issue  at 
maturity.  Thus  any  bond  issue  is  "under- 
lying" which  has  a  junior  security  following  it. 
Hence,  a  bond  need  not  necessarily  be  a  first 
mortgage  to  be  described  as  "underlying."  It 
may  itself  be  subject  to  a  further  mortgage 
or  mortgages  which  underlie  it.  On  many 
railroad  systems,  and  indeed  in  other  corpora- 
tions there  are  frequently  several  "layers"  of 
underlying  issues,  and  on  portions  of  the  Erie 
and  of  the  Reading  systems,  there  are  as  many 
as  ten  mortgages  secured,  "underlying,"  or,  if 
you  wish  to  reverse  the  viewpoint,  "overlying" 
one  another. 

A  refunding  mortgage  bond  is  an  isssue 
especially  created  for  taking  care  of  maturing 
issues,  supplying  additional  capital,  etc.,  and 


52      ART  OF  WALL  STREET  INVESTING 

for  reducing  fixed  charges.  The  modern  re- 
funding bond  on  steam  railroads  is  usually 
an  issue  running  one  hundred  years,  bearing 
a  comparatively  low  rate  of  interest,  and  gen- 
erally secured  by  a  "blanket"  mortgage  on  "all 
the  property  now  owned  or  hereafter  acquired," 
subject,  of  course,  to  the  prior  mortgages  which 
are  to  be  retired  as  they  fall  due.  Often,  a 
very  large  issue  is  authorized,  in  order  that 
funds  may  be  available  for  future  acquisitions. 
One  of  the  first  large  refunding  issues  was  that 
of  the  New  York  Central  3j^%  refunding 
mortgage  issued  in  June,  1897.  The  author- 
ized issue  was  $100,000,000,  of  which  $70,- 
397,333  were  originally  reserved  to  retire  cer- 
tain prior  liens^  with  $14,622,667  for  premiums 
on  the  bonds.  The  remaining  $15,000,000  were 
to  be  issued  for  new  construction  or  property, 
after  Dec.  31,  1903,  at  a  rate  not  exceeding 
$1,000,000  per  annum. 

In  authorizing  these  bonds  the  maturity  of 
several  underlying  liens  was  anticipated  by  a 
few  years.  It  so  happened  that  all  the  main- 
line mortgages  on  the  New  York  Central  sys- 
tem matured  between  1897  and  1905,  and  in 
authorizing  the  new  3^^%  mortgage  it  was 
made  a  part  of  the  plan  to  allow  holders  to 
exchange  their  old  bonds  at  once,  on  an  equit- 


BONDS  AND  WHAT  THEY  REPRESENT  53 

able  basis,  and  without  waiting  for  the  dates  of 
maturity.  This  exchange  plan  was  made 
optional  with  the  old  bondholders,  but  a  large 
proportion  of  them  took  advantage  of  it.  To- 
day all  the  prior  liens  have  been  retired  and 
nearly  $85,000,000  of  the  three  and  one-half 
per  cents  are  today  outstanding.  It  will  be 
observed  that  they  are  now  an  actual  first  lien 
on  the  main  lines  of  the  system,  and  their  re- 
funding features  have  ceased  to  be  a  factor. 
There  are  today  a  large  number  of  refunding 
issues,  and  because  of  their  improving  posi- 
tion, the  length  of  time  they  run,  and  so  forth, 
they  are  generally  more  popular  with  perma- 
nent investors  than  the  prior  issues  which 
usually  underlie  them. 

A  participating  bond  is  a  modern  term 
describing  an  issue  which  is  entitled  to  partici- 
pate in  income  or  profits,  under  certain  condi- 
tions, beyond  its  fixed  rate  of  interest.  The 
most  notable  instance  of  a  participating  bond 
were  the  Oregon  Short  Line  Railroad  partici- 
pating fours,  issued  in  1902,  but  called  for  pay- 
ment and  cancelled  on  February  i,  1905.  These 
bonds  were  issued  to  finance  the  purchase  by 
the  Union  Pacific  interests  of  Northern  Securi- 
ties Company  stock,  and  the  latter  was  depos- 
ited as  collateral  with  the  trustee.    The  mort- 


54      ART  OF  WALL  STREET  INVESTING 

gage  required  that  in  addition  to  receiving  4% 
interest,  the  bonds  were  to  participate  in  any 
dividends  over  4%  that  the  Northern  Securi- 
ties Company  stock  might  pay.  Thus,  when 
the  Northern  Securities  Company  dividend 
rate  was  increased  to  5%,  these  bonds  re- 
ceived a  dividend  of  1%  in  addition  to  their 
regular  interest,  and  of  course  shared,  to  an 
extent,  in  the  speculative  value  thus  engen- 
dered by  an  additional  division  of  profits.  The 
Northern  Securities  merger  being  afterward 
set  aside,  these  participating  bonds  were  large- 
ly converted  into  a  new  refunding  issue  of 
fours,  guaranteed  by  the  Union  Pacific  Rail- 
road^ and  the  balance  were  called  and  paid  off 
at  the  redemption  price  of  one  hundred  and 
five. 

An  equipment  bond  is  an  issue  created  to 
acquire  equipment,  and  is  secured  directly 
upon  locomotives,  cars,  and  so  forth.  It  fre- 
quently happens  that  a  railroad  finds  it  neces- 
sary to  increase  its  equipment  rapidly  in  order 
to  handle  a  growing  business  in  the  most  eco- 
nomical way.  In  most  cases,  large  purchases 
of  this  kind  involve  the  borrowing  of  money, 
as  railroads  do  not  always  have  funds  available 
for  such  purposes.  In  view  of  this  situation, 
"equipment  trusts"  or  equipment  bonds  have 


BONDS  AND  WHAT  THEY  REPRESENT  55 

been  invented.  These  usually  run  for  short 
periods  only,  generally  being  paid  off  in  instal- 
ments or  serially,  ranging  over  several  years. 
In  some  cases  the  payment  of  the  principal  of 
these  equipment  mortgages  is  done  out  of 
current  earnings;  in  other  cases  out  of  the 
proceeds  of  other  bond  issues.  Often  there  are 
several  issues  of  equipment  obligations  on 
large  properties,  maturing  at  different  periods 
and  secured  on  different  groups  of  locomotives 
and  cars.  Equipment  bonds  usually  bear  the 
current  rates  of  interest  which  may  be  prevail- 
ing for  a  good  security  at  the  time  they  are  is- 
sued. They  are  nearly  always  a  well-protected 
obligation,  as  they  cover  tangible  property, 
the  value  of  which  is  easily  determined. 

In  addition  to  the  foregoing,  there  are  vari- 
ous other  designations  sometimes  given  to 
bond  issues,  such  as  land  grant  bonds,  trust 
mortgage  bonds,  currency  bonds,  and  so  forth, 
which  have  either  been  covered  in  the  more 
general  terms  described  in  the  foregoing  pages, 
or  else  carry  names  which  are  sufficient  de- 
scriptions in  themselves.  Thus,  currency  bonds 
are  issues  which  bear  no  "gold  clause,"  but  are 
payable,  principal  and  interest,  in  the  currency 
of  the  country,  whatever  that  may  happen  to 
be.     During  the  days  of  the  free-silver  agita- 


56     ART  OF  WALL  STREET  INVESTING 

tion,  and  for  nearly  a  decade  before,  nearly  all 
railroads  and  financiers  inserted  the  "gold 
clause"  in  bonds,  which  was  simply  a  state- 
ment printed  in  full  on  each  bond  and  coupon 
to  the  effect  that  the  issue  would  be  paid,  not 
in  "money"  or  "currency,"  but  in  gold.  Thus, 
the  gold  clause  came  to  be  a  feature  of  the  ut- 
most importance,  for  it  was  almost  universally 
held  (and  especially  in  Wall  Street)  that  free 
coinage  of  silver  would  mean  an  appreciation 
of  one  hundred  per  cent,  in  the  value  of  gold 
as  measured  by  the  money  standard.  Whether 
this  would  have  occurred  or  not  is  still  a 
mooted  question  among  the  students  of  the 
currency  problem,  but  in  reality,  if  the  rail- 
roads had,  under  such  a  condition,  been  obliged 
to  pay  in  gold,  it  will  be  seen  that  they  would 
all  have  defaulted  on  both  principal  and  inter- 
est. Therefor  the  "gold  clause"  was  largely 
sentimental  after  all.  Like  the  guarantee 
clause  of  a  bond  whose  guarantor  had  not  the 
proper  resources  to  take  care  of  its  obligations 
in  case  the  demand  came  upon  him,  so  the  gold 
clause,  while  sentimentally  beneficial  to  sellers 
of  bonds,  could  not  have  been  of  much  prac- 
tical usefulness  if  the  actual  conditions  had 
come  about  which  it  was  created  to  circum- 
vent.   But,  as  in  every  other  walk  of  life,  un- 


BONDS  AND  WHAT  THEY  REPRESENT  57 

sound  premises  are  often  cherished  and  erected 
into  superstitions  in  Wall  Street,  and  there  are 
many  eminent  men  there  to  this  day,  who  will 
still  hotly  contest  that  it  is  just  as  necessary  as 
ever  to  put  the  "gold  clause"  in  a  bond,  to 
avoid  all  danger  of  depreciation;  in  spite  of 
the  fact  that  gold  is  now  tending  to  depreciate 
and  holding  down  the  prices  of  bonds  as  a  re- 
sult. 

The  chief  point  to  be  emphasized  in  the 
chapter  on  Bonds  and  What  They  Represent 
is  that  the  mere  title  of  an  issue  may  mean 
nothing  from  the  standpoint  of  safety  and 
value.  These  descriptive  details  refer  in  no 
way  to  the  value  of  a  specific  bond,  but  simply 
to  the  anatomy  of  the  different  issues.  Inva- 
riably the  rule  should  be,  when  selecting  a 
bond  for  investment,  whether  it  is  a  direct 
mortgage,  a  consolidated  or  a  general  issue,  a 
collateral  trust  or  an  income,  a  debenture  or  a 
refunding  bond,  to  learn  something  of  the 
property  which  it  represents.  If  it  is  a  railroad, 
what  its  capital  is  and  what  its  earnings  are, 
who  its  managers  or  controlling  interests  are; 
its  alliances  and  rivalries;  its  territory  and  its 
strategic  position;  its  past  history  and  future 
prospects.  These  are  general  fundamental 
matters  of  the  first  importance,  and  it  is 
through  neglect  of  such  knowledge  that  a 
large  proportion  of  investors  are  mislead  or  go 


58     ART  OF  WALL  STREET  INVESTING 

astray.  As  an  example,  let  me  cite  the  case  of 
the  Rock  Island  Company.  This  is  a  very 
large  corporation,  with  capital  running  into 
the  hundreds  of  millions  and  controlling  in  the 
neighborhood  of  18,000  miles  of  railway  lines. 
Its  securities  are  about  as  heterogeneous  as 
they  could  possibly  be  made,  even  if  they  had 
been  created  and  brought  together  by  design 
rather  than  by  accident.  In  all  there  are  up- 
wards of  seventy  bond  issues  on  the  system, 
including  nearly  every  conceivable  kind  of 
mortgage,  good,  doubtful  and  indifferent.  There 
are  first  m^ortgages  of  very  inferior  worth  and 
bonds  not  mortgages  at  all,  and  yet  of  high 
standing.  How  easy  it  is,  therefor,  to  err  in 
passing  upon  bonds  in  this  system,  unless  a 
good  deal  of  general  fundamental  knowledge 
is  first  acquired.  Thus  one  might  naturally  as- 
sume that  the  four  per  cent,  collateral  bonds  of 
this  company,  due  in  2002,  were  a  sounder  in- 
vestment than  the  refunding  fours  of  1934,  or 
that  the  gold  fours  of  1908-18  were  better 
secured  than  the  general  mortgage  fours  of 
1988.  A  little  expert  knowledge  in  these  mat- 
ters will  set  the  judgment  right,  however;  and 
this  fundamental  knowledge  once  gained  and 
uniformly  employed  in  the  judging  of  bonds 
will  always  prove  of  infinite  value  to  the  pros- 
pective investor  in  Wall  Street, 


m 

Stocks  and  ^A/^lat  they  Are 

T^HE  cardinal  distinction  between  bonds 
-*-  and  stocks  is  clear,  simple  and  concisely 
explained.  Bonds  represent  or  are  secured  by 
liens  on  property.  Stocks  are  the  property. 
Sometimes  people  fail  to  realize  that  stocks  are 
the  property  itself  and  persist  in  assuming  that 
they  are  merely  a  sort  of  legal  attachment 
to  it.  But  this  is  entirely  erroneous.  When 
one  owns  stock  in  the  United  States  Steel  Cor- 
poration, he  is  actually  a  part  owner  of  those 
great  properties,  but  if  he  owns  a  bond  of  this 
corporation  he  merely  shares  with  others  a 
mortgage  which  is  secured  on  the  property. 
Hence,  if  a  stockholder,  he  gains  or  loses  when 
the  property  appreciates  or  depreciates  in  earn- 
ing power  or  value;  but  if  a  bond  holder  in  a 
well-secured  mortgage,  he  neither  gains  nor 
loses  as  the  earnings  and  business  rises  or  falls, 
but  his  asset  remains  practically  stationary  in 
value.     Stocks   are   also   affected   by   various 

59 


6o     ART  OF  WALL  STREET  INVESTING 

Other  influences  which  in  no  way  affect  bonds. 
Thus,  the  stockholder,  being  a  joint  owner  with 
others  of  the  actual  property,  therefor  has,  at 
least  theoretically,  a  voice  in  its  management. 
This  "voice"  is  represented  in  his  voting 
power,  each  stockholder  having  the  right  to 
cast  one  vote  for  each  share  of  stock  he  owns, 
at  annual  meetings  called  together  for  the  elec- 
tion of  officers  and  directors,  or  at  special  meet- 
ings called  for  various  other  purposes,  such  as 
authorizing  mortgages,  new  issues  of  stock, 
etc.,  etc.  Usually  preferred  and  common 
stocks  have  equal  voting  power,  but  there  are 
exceptions  where  this  is  not  true,  and  where  the 
preferred  shares  have  two  or  more  votes  to  the 
common  stockholders  one.  On  the  other  hand 
cases  exist  where  the  preferred  stockholders 
waive  their  voting  power  in  consideration  of 
receiving  regularly  a  specified  rate  of  divi- 
dends, and  only  re-assume  their  right  in  case 
their  income  is  discontinued.  This  same  pro- 
vision has  sometimes  been  made  in  bond  is- 
sues, usually  income  or  debenture  bonds. 

A  common  stock  is  an  issue  which  bears  the 
designation  "common"  to  distinguish  it  from  a 
"preferred"  issue  of  the  same  corporation.  If 
no  preferred  issue  exists,  the  qualifying  word 
"common"  is  not  necessary  and  is  not  usually 


STOCKS  AND  WHAT  THEY  ARE    6i 

employed.  In  such  cases  the  issue  is  simply  re- 
ferred to  as  such  and  such  a  stock.  Many  of 
the  railroads  and  industrials  which  are  dealt  in 
in  Wall  Street  have  both  common  and  pre- 
ferred issues,  however.  Roads  like  the  New 
York  Central,  Pennsylvania,  etc.,  are  the  ex- 
ception rather  than  the  rule.  Of  one  hundred 
and  thirty-four  railroads  and  industrials  whose 
issues  are  "active"  on  the  Stock  Exchange  and 
are  daily  quoted  in  papers  like  the  New  York 
Evening  Post,  eighty-eight  have  both  pre- 
ferred and  common  stocks  outstanding,  while 
only  forty-six  have  but  one  class  of  stock. 

Common  stock  is  generally  entitled  to  divi- 
dends from  earnings  only  after  all  prior 
charges  and  preferred  stock  dividends  have 
been  satisfied.  In  other  words,  it  is  the  last 
security  to  be  taken  care  of  in  the  dividing  of 
profits.  Hence,  the  common  stock  is  more 
often  a  speculative  or  semi-speculative  security 
than  preferred  stocks  or  bonds.  In  many  cases 
common  stocks  have  never  received  dividends 
and  probably  never  will.  Their  chief  value, 
under  such  conditions,  is  measured  partly  by 
their  voting  power  and  partly  by  the  fluctuat- 
ing value  of  the  equity  in  the  property  of 
which  they  are  shares.  Thus,  in  the  case  of 
the  common  stock  of  the  Wabash   Railroad, 


62      ART  OF  WALL  STREET  INVESTING 

the  present  value  or  cost,  aside  from  tem- 
porary speculative  manipulation,  is  measured 
almost  entirely  by  the  voting-power,  as  there 
is  no  immediate  prospect  of  dividend  payments 
of  any  kind,  and  the  equity  back  of  it  is  so 
nebulous  and  uncertain  that  it  cannot  be  sanely 
measured  at  all.  This  is  also  somewhat  true 
of  stocks  like  United  States  Steel  common  and 
Republic  Iron  &  Steel  common.  While  these 
stocks  may  temporarily,  in  an  income  account, 
show  an  apparent  earning  power,  yet  when  we 
examine  their  incomes  over  a  reasonable  period 
of  time,  it  is  usually  found  that  the  value  is 
almost  purely  speculative,  and  that  while  in 
prosperous  times  they  may  earn  a  large  sur- 
plus, yet  in  periods  of  depression  even  the  divi- 
dends on  their  preferred  stocks  are  placed  in 
jeopardy. 

While  common  stocks  are  usually  entitled 
to  all  divisible  earnings  after  payment  of  inter- 
est charges,  sinking  funds  and  preferred  divi- 
dends, yet  there  are  exceptions  to  this  rule. 
In  the  case  of  many  railroads,  the  preferred 
issues  share  certain  earnings  after  the  common 
has  received  a  given  rate.  For  instance,  the 
preferred  stock  of  the  Chicago,  Milwaukee  & 
St.  Paul  Railway  has  a  prior  right  to  7  % ;  the 
common  then  receives  7%,  after  which  each 


STOCKS  AND  WHAT  THEY  ARE    63 

class  shares  pro  rata  in  any  further  division 
of  profits.  There  are  other  instances  of  a  gen- 
erally similar  nature,  in  some  cases  the  com- 
mon receiving  only  one-half  of  the  divisible 
surplus  over  the  preferred  dividends,  the  other 
half  going  to  the  preferred  shares  themselves 
as  additional  dividends.  In  this  case  a  given 
preferred  stock  might  first  receive  6%,  then 
both  common  and  preferred  1%  each  or  more, 
as  the  case  might  be.  Consequently,  when  the 
common  is  being  paid  6%,  the  preferred  will 
be  receiving  12%  per  annum. 

A  preferred  stock  is  a  portion  of  a  corpora- 
tion's capital  issue  which  takes  precedence  over 
the  remainder,  either  as  to  assets  or  dividends, 
or  both.  There  are  many  different  characteris- 
tics in  preferred  stock  issues ;  some  have  cumu- 
lative and  some  non-cumulative  dividend 
clauses;  some  have  prior  security  as  to  assets 
and  some  not ;  some  have  exclusive  power  over 
the  issuing  of  new  mortgages  or  increases  of 
stock  issues  and  some  have  not.  The  Atchison, 
Topeka  &  Santa  Fe  Railway  requires  that  its 
preferred  stock  receive  5%  non-cumulative 
dividends;  that  it  have  preference  over  the 
common  shares  as  to  assets  (up  to  its  face- 
value),  and  that  no  new  mortgages  or  addi- 
tional preferred  stock  be  issued  without  the 


^4     ART  OF  WALL  STREET  INVESTING 

consent  of  a  majority  of  the  holders.  By  non- 
cumulative  is  meant  that  in  case  the  dividend 
is  not  paid  in  a  given  year,  it  may  be  "skipped" 
entirely,  "wiped  off  the  slate,"  so  to  speak,  and 
in  future  only  the  regular  rate  need  be  cur- 
rently paid  before  beginning  payments  on  the 
common  stock.  It  is,  therefor,  obvious  that 
the  non-cumulative  clause  in  a  preferred  stock 
is  of  advantage  to  the  common  holder,  and 
may  become  a  decided  disadvantage  to  the 
preferred  holder. 

While  most  railroad  preferred  stocks  are 
non-cumulative  as  to  dividends,  this  is  not  so 
sweepingly  true  of  industrials.  Of  eighty- 
four  active  industrial  preferred  stocks  de- 
scribed in  Moody's  Manual  for  1905,  fifty-eight 
carry  cumulative  clauses  and  twenty-six  non- 
cumulative,  the  proportion  of  those  with  cumu- 
lative clauses  being  66%  to  the  whole.  In  the 
case  of  a  cumulative  stock  all  back  dividends 
are  regarded  as  an  actual  liability,  and  must  be 
paid  before  those  currently  required  are  satis- 
fied. The  result  of  this  is  that  when  the  corpo- 
ration cannot  pay  the  full  dividend  or  any  of  it, 
the  amount  unpaid  accumulates  as  a  direct  obli- 
gation. Many  industrial  preferred  stocks  are 
in  arrears  on  their  dividends.  Among  such  at 
the  present  time  may  be  mentioned  American 


STOCKS  AND  WHAT  THEY  ARE    65 

Can  Company  preferred  (a  7%  stock),  about 
19%  in  arrears;  American  Hide  and  Leather 
preferred  (also  a  7%  stock),  37%  in  arrears; 
American  Writing  Paper  Company  preferred 
(7%)»  38%  in  arrears;  International  Silver 
preferred,  about  20% ;  United  States  Cotton 
Duck  Corporation,  about  17%.  These  arrears 
will  all  have  to  be  taken  care  of  in  some  way 
before  the  common  stocks  which  follow  them 
can  claim  any  share  of  the  profits.  In  many 
cases,  arrears  of  this  kind  are  wiped  out  by 
compromise  or  other  capital  readjustment. 
The  latter  expedient  has  been  adopted  in  sev- 
eral cases  by  solvent,  money-making  corpora- 
tions, which  have  found,  through  an  extended 
experience,  that  the  conditions  of  their  busi- 
ness hardly  warrant  the  heavy  dividend 
charges  which  the  original  capitalization  pro- 
posed. As,  under  such  circumstances  it  would 
be  practically  futile  to  continue  to  allow  the 
high  dividend  charges  to  accumulate  indefi- 
nitely, a  plan  is  usually  devised  to  take  care 
of  back  dividends  by  a  further  stock  issue  or 
bond  issue,  and  then  the  cumulative  rate  is 
reduced  to  a  figure  which  the  business  can 
reasonably  stand.  This  idea  of  readjustment  is 
illustrated  in  a  notable  manner  in  the  case  of 
the  United  States  Leather   Company.     This 


66      ART  OF  WALL  STREET  INVESTING 

company  was  actually  reorganized  and  its  capi- 
talization entirely  transformed  for  the  purpose 
of  financing  the  accumulations  of  over  40^0  of 
back  preferred  dividends  and  to  get  rid  of  the 
high  8%  dividend  charge  for  the  future. 

Stocks  are  not  nearly  so  heterogeneous  as 
are  bond  issues.  Besides  the  ordinary  stock 
and  the  two  classes  of  common  and  preferred 
there  are  comparatively  few  issues  which  do 
not  come  under  these  headings.  Among  these 
few  may  be  mentioned  debenture  stock,  a 
special  kind  of  issue  popular  on  some  of  the 
Canadian  roads,  and  also  on  the  Chicago  Great 
"Western  Railway.  A  debenture  stock  is  gen- 
erally regarded  as  being  in  the  same  category 
as  a  high-grade  preferred  issue,  with  usually 
some  kind  of  special  feature  to  add  to  its  secur- 
ity. As  a  matter  of  fact,  however,  its  position 
and  the  earnings  of  the  company  are  the  proper 
measures  of  its  value  and  not  its  "debenture" 
feature.  The  Chicago  Great  Western  Railway 
debentures  are  "guaranteed"  to  pay  4%  inter- 
est, the  guarantor  being  the  road  itself.  But 
this  guarantee  is  not  a  more  binding  obligation 
than  would  be  a  cumulative  clause  in  a  pre- 
ferred stock,  and  if  the  latter  had  preference 
as  to  its  assets,  its  legal  position  would  be  in 
every  way  as  secure. 


STOCKS  AND  WHAT  THEY  ARE         67 

In  analyzing  or  judging  the  value  of  stocks 
in  general,  quite  different  methods  should  be 
employed  in  the  various  classes  of  corporate 
issues.  Stocks  of  railroads,  industrials,  trac- 
tions, mines,  and  so  forth,  while  all  of  the  same 
species,  are  each  of  a  different  genus,  and  they 
are  all  the  result  of  different  evolutionary  pro- 
cesses. Thus,  m^ost  of  the  railroad  stocks  oc- 
cupy a  much  higher  plane  as  investments  than 
do  the  industrials,  and  it  is  generally  felt 
that  they  are  safer  and  less  speculative. 
This  is  due  to  several  causes.  In  the  case 
of  the  older  issues,  the  railroad  properties 
of  which  they  are  part  have  greatly  appreci- 
ated in  value  and  earning  pov^7er;  their  territo- 
ries have  grown  vastly  in  population,  and  their 
rights  of  way,  terminals  and  other  advantages 
(acquired  many  years  ago),  have  all  become  of 
enormous  value.  While  they  may  have  origi- 
nally represented  little  beside  speculation,  and 
their  properties  may  have  been  mortgaged  "up 
to  the  hilt,"  so  to  speak,  yet,  like  the  owner  of 
a  piece  of  land  in  the  heart  of  a  grov/ing  city, 
they  have  enjoyed  the  felicity  of  seeing  an 
enormous  increment  added  to  the  value  of  their 
property  over  the  period  which  may  have 
elapsed  since  the  early  speculative  days.  It 
was  not  so  many  years  since  the  Delaware, 


68     ART  OF  WALL  STREET  INVESTING 

Lackawanna  &  Western  Railway  was  re- 
garded as  a  property  which,  while  not  very 
heavily  bonded,  would  probably  never  be  able 
to  earn  or  pay  more  than  a  7%  dividend  on  its 
stock  issue.  It  could  never  become  a  fast 
freight  line,  nor  a  through  passenger  line  like 
the  Pennsylvania  or  the  New  York  Central. 
Indeed,  its  through  connections  were  not 
thought  to  be  as  good  as  those  of  the  Erie, 
and  while  it  was  in  every  way  sounder  finan- 
cially than  the  latter,  yet  its  operating  methods 
were  regarded  as  riiore  or  less  antiquated  and 
it  bore  the  nickname  of  "delay,  linger  and 
wait."  Certainly  its  future  could  not  equal, 
it  was  thought,  that  of  the  Central  Railroad  of 
New  Jersey.  And  yet,  because  of  the  vast 
growth  of  population  along  its  line,  the  great 
development  and  concentration  of  the  anthra- 
cite coal  properties  through  which  it  runs, 
combined  with  various  traffic  alliances,  the 
value  of  the  property  has  appreciated  to  a  point 
far  beyond  the  wildest  visions  of  those  of  ten 
or  fifteen  years  ago.  Today  the  stock  of  the 
company  is  selling  at  nearly  five  times  its  par 
value,  it  is  paying  10%  dividends  and  earning 
over  50%,  and  all  this  without  any  material 
addition  of  mileage  or  of  acquired  properties. 
The  same  tale  can  be  told  of  nearly  all  of  the 


STOCKS  AND  WHAT  THEY  ARE         69 

older  and  established  lines,  though  not  always 
to  the  same  degree  as  in  the  case  of  the  Dela- 
ware, Lackawanna  &  Western  Railway. 
There  are  many  newer  properties,  it  is  true, 
where  the  stocks,  and  particularly  the  "com- 
mon" issues  are  far  more  speculative  and  rep- 
resent much  less  tangible  property.  Thus, 
there  has  been  a  certain  amount  of  modem 
financing  in  railroad  consolidations,  as  witness 
the  Rock  Island  system,  the  new  common 
stock  of  which  represents  practically  no  tangi^ 
ble  property  today,  and  sells  at  purely  specu- 
lative prices,  even  the  usual  voting  power  hav- 
ing practically  been  withheld  from  it. 

Therefor,  in  judging  railroad  stocks,  these 
special  conditions  should  be  taken  into  consid- 
eration as  being  the  most  vital  of  factors.  The 
railroads  all  possess  special  privileges  in  their 
rights  of  way  and  terminals,  which  in  a  coun- 
try like  ours  are  of  constantly  growing  value 
because  of  the  swelling  population  and  steady 
concentration  of  wealth.  It  goes  without  say- 
ing that  this  general  tendency  will  probably 
be  continued  for  at  least  several  generations 
more.  Hence,  even  the  least  secured  railroad 
stock,  unless  there  are  some  special  disadvan- 
tageous features  connected  with  it,  will  bear 
examination  in  this  light,  for  in  the  course  of 


70     ART  OF  WALL  STREET  INVESTING 

time,  the  income  will  automatically  increase 
with  the  growth  of  population  and  wealth  and 
the  stock  be  benefited  thereby. 

This  principle,  hov/ever,  cannot  be  so  gener- 
ally applied  to  industrial  stocks.  These  issues 
are  purely  a  creation  of  modern  times,  as  are 
the  great  corporations  and  consolidations 
which  have  brought  them  into  being.  As  is 
well  known,  nearly  all  the  newer  industrial 
corporations  are  greatly  over-capitalized,  and 
as  a  result,  the  common  stocks  especially  are 
of  a  very  speculative  nature,  do  not  represent 
anything  except  voting  power  and  future 
hopes,  and  generally  sell  far  belov7  their  face 
values.  This  condition  of  things  has  been 
brought  about  by  certain  apparent  necessities 
in  financing,  and  also  because  the  formation  of 
these  great  corporations  has  been  of  the  nature 
of  pure  innovation,  and  the  outcome  in  mat- 
ters of  economy,  in  methods,  in  new  advan- 
tages derived  through  consolidation  and  other 
benefits  assumed  to  be  gained  by  large  scale 
management  and  production,  could  not  be  defi- 
nitely known  or  judged  until  tested  over  a 
reasonably  long  period  of  time.  Therefor  the 
financing  of  most  of  these  companies  has  been 
on  a  sem.i-speculative  basis,  and  in  order  to 
carry    through    consolidations    and    get    the 


STOCKS  AND  WHAT  THEY  ARE  71 

necessary  financial  backing,  it  has  been  found 
necessary  to  pay  very  liberal  commissions  to 
underwriting  syndicates  and  promoters  as  well 
as  bankers  and  others  to  have  the  consolida- 
tions carried  through  at  all. 

The  method  employed  has  usually  involved 
the  issue  of  a  preferred  stock  to  an  amount 
representing  the  appraised  value  of  the  con- 
solidated plants.  As  these  values  have  often 
been  actually  made  higher  than  the  real  worth 
of  the  properties,  there  has  sometimes  resulted 
a  good  deal  of  inflation  even  in  the  preferred 
issue.  In  addition,  a  further  amount  of  the  pre- 
ferred stock  is  then  sold  for  the  purpose  of 
raising  v/orking  capital.  When  this  is  not 
done  a  bond  issue  of  some  kind  is  usually  ar- 
ranged for  this  special  purpose.  A  very  large 
issue  of  common  stock  is  next  created  and  an 
underwriting  syndicate  undertakes  to  pay  the 
face  value  for  all  of  the  preferred  shares 
not  otherwise  used  in  exchange  for  plants, 
property,  and  so  forth,  receiving  as  its  com- 
mission for  doing  this  100%  in  some  cases,  and 
in  others  as  much  as  200%,  in  common  stock. 
Some  common  stock  is  also  issued  for  the  pro- 
moter, perhaps  a  block  is  issued  to  go  to  the 
former  owners  of  the  plants  and  to  other  inter- 
ested parties  and  for  other  special  purposes. 


72     ART  OF  WALL  STREET  INVESTING 

The  syndicate  then,  usually  through  bankers, 
undertakes  to  dispose  of  the  underwritten  pre- 
ferred stock  to  investors  by  giving,  as  a  bonus, 
50%  to  100%  in  common  stock.  The  effect  of 
all  this  "watering"  of  the  properties  is  that  the 
preferred  stock  is  immediately  quoted  far  be- 
low its  face  value  and  the  common  sells  at  a 
very  low  price;  the  fact  being  that  the  true 
value  of  the  properties  may  be  fairly  repre- 
sented by  80%  of  the  face  value  of  the  pre- 
ferred and  20%  of  the  face  value  of  the  com- 
mon. Even  if  the  preferred  stock  pays  the  full 
dividend  promised  (usually  6%  or  7%)  it  will 
not  for  a  long  time  appreciate  to  its  par  value, 
and  the  comm.on  of  course  remains  at  a  very 
low  figure  until  the  earnings  actually  begin  to 
accumulate  to  an  amount  where  some  kind  of 
definite  steady  dividend  is  assured  on  the  com- 
mon. 

In  the  matter  of  appreciation  through  un- 
earned increment,  the  industrial  corporations 
as  a  class  are  not  in  nearly  so  fortunate  a  posi- 
tion as  the  railroads.  In  exceptional  cases, 
they  have  advantages  of  a  high  order,  which 
may  or  may  not  appreciate;  in  very  few  cases 
have  they  the  certain  and  fundamental  privi- 
lege in  such  large  percentage  as  the  railroads. 
Special  legislation  may  benefit  an  industrial  or 


STOCKS  AND  WHAT  THEY  ARE    73 

it  may  injure  it;  tariffs,  patents,  trade-marks, 
and  so  on,  will  frequently  benefit  an  industrial 
property,  but  these  are  in  a  sense  fixed  or  sta- 
tionary advantages,  and  do  not  necessarily  ap- 
preciate in  value  as  do  the  railroads.  The  lat- 
ter have  the  fundamental  advantage  of  at  all 
times  having  their  feet  directly  upon  the 
ground.  It  is  true,  of  course,  that  the  trusts 
or  industrials  do  finally  rest  on  benefits  similar 
to  those  of  the  railroads,  which  tend  to  appre- 
ciate in  the  course  of  time  in  standing  and 
stability.  Thus,  coal  mining  properties,  partic- 
ularly in  the  limited  anthracite  field,  are  in  this 
category;  so  are  the  great  realty  and  construc- 
tion companies;  also  the  steel  and  iron  manu- 
facturing corporations  who  ov/n  valuable  ore 
and  coal  deposits,  and  the  oil  refineries  who 
also  own  the  original  sources  of  supply.  But 
even  these  advantages  are  in  a  sense  uniform 
and  certainly  their  tendencies  to  appreciate  in 
value  are  not  to  be  classed  with  the  more  direct 
tendency  shown  in  the  steam  railroad  proper- 
ties. Of  course  in  the  final  analysis,  the  bene- 
fits accruing  to  transportation  companies,  also 
accrue  to  the  benefits  of  the  general  class  of 
industrials  and  will  continue  so  to  a  greater 
degree  as  time  goes  on,  but  not  for  many  gen- 
erations to  the  point  sometimes  demanded  by 


74     ART  OF  WALL  STREET  INVESTING 

the  largely  inflated  issue  of  common  and  pre- 
ferred industrial  stocks. 

Industrial  stocks  are  either  cumulative  or 
non-cumulative  and  usually  carry  dividends  of 
either  6%  or  7%.  The  cumulative  clauses  usu- 
ally work  on  the  principle  already  described 
a  few  pages  back.  The  dividends  are  paid 
quarterly  in  most  cases,  but  sometimes  semi- 
annually. In  no  cases  are  dividends  supposed 
to  be  paid  unless  actually  earned,  although 
there  are  many  instances  where  a  corporation 
pays  a  dividend  cut  of  accumulated  surplus 
even  if  not  currently  earned.  It  will  be  readily 
realized,  however,  that  this  kind  of  policy,  if 
followed  to  any  m.aterial  extent,  cannot  be 
regarded  as  conservative.  No  matter  how 
large  an  accumulated  surplus  may  be,  if  a 
grov/ing  corporation  is  currently  earning  for 
any  length  of  time  only  4%  on  its  capital,  it  is 
not  sound  management  to  pay  out  5^.  Where 
a  company  begins  to  do  this  it  should  be 
closely  watched. 


IV 

Analyzing  Railroad  Securities 

T) ROPER  judging  o£  the  values  of  railroad 
^  securities  involves^  first  of  all,  the  ability 
to  analyze  railroad  reports.  The  report  of  a 
railroad  need  not  and  should  not  necessarily 
be  left  to  the  study  of  the  expert  for  analysis, 
as  each  investor  may,  with  a  reasonable 
amount  of  careful  training,  learn  to  decipher 
the  statements  of  the  report  for  himself.  While 
reports  are,  to  the  uninitiated,  dry  and  com- 
plex affairs,  being  made  up  of  a  number  of 
statistical  statements  and  other  groups  of  fig- 
ures which  seem  largely  meaningless,  yet,  as  a 
matter  of  fact,  the  salient  points  in  even  the 
most  complex  and  voluminous  reports  can  usu- 
ally be  deciphered  at  short  notice,  if  one  is  but 
familiar  with  the  few  fundamental  rules  which 
will  be  explained  in  the  following  pages. 

As  Mr.  Thomas  F.  Woodlock  pointed  out  in 
his  little  book,  "The  Anatomy  of  a  Railroad 
Report,"  written  over  ten  years  ago,  "the 
object  of  a  railroad  report  should  be  to  convey 


75     ART  OF  WALL  STREET  INVESTING 

an  accurate  idea  of  the  position  o£  the  prop- 
erty^ both  physical  and  financial,  so  that  one 
may  know  pretty  well  all  the  principal  circum- 
stances affecting  its  welfare." 

In  examining  the  railroad  properties  gener- 
ally, before  we  consider  the  securities  specific- 
ally, we  have  three  distinct  divisions  of  the 
properties  to  analyze.  First,  the  physical  char- 
acteristics; second,  the  earning  power,  and 
third,  the  financial  characteristics.  The  first 
and  fundamental  feature  of  a  railroad  prop- 
erty is,  of  course,  the  physical.  This  includes 
location  and  length  of  road;  character  of 
territory  covered  and  contiguous  to  the  same; 
terminal  facilities  and  connections;  volume 
and  character  of  business  carried  on;  volume 
and  description  of  equipment  emiployed. 

The  second  feature  to  be  examined  is  the 
income  or  earning  power  of  the  property,  and 
this  involves  an  examination  of  the  company's 
revenue  account,  which  should  cover  the  fol- 
lowing points:  Gross  earnings,  operating  ex- 
penses, net  earnings,  income  from  other 
sources,  fixed  charges,  dividends  and  surplus. 

The  financial  characteristics  should  then  be 
examined.  This  involves  an  analysis  of  the 
balance  sheet,  so  called,  which  is  always  made 
up  of  the  following  four  divisions : 


ANALYZING  RAILROAD  SECURITIES    77 

Capital  assets ;  current  assets ;  capital  liabili- 
ties ;  current  liabilities. 

With  the  true  and  proper  facts  at  hand  cov- 
ering the  above  features,  a  railroad  report  can 
be,  after  a  little  experience,  analyzed  quite  sim- 
ply, and  the  value  of  a  given  security  then 
judged  very  accurately  in  connection  with  it. 
Nowadays  nearly  all  the  railroads  of  any 
standing  or  importance  whatever,  give  prac- 
tically all  of  the  foregoing  facts  in  their  reports 
in  one  way  or  another,  and  some  of  them  give 
a  great  deal  more.  Where  the  facts  are  not 
given,  however,  it  will  usually  be  found  that 
they  can  be  obtained  in  the  reports  of  the 
Interstate  Commerce  Commission,  although 
the  statements  of  the  latter  are  not  given  to 
the  public  as  promptly  as  one  might  wish. 

I.  Physical  Characteristics.  An  examina- 
tion of  this  branch  of  the  subject  must  begin 
with  an  examination  of  the  location  and  length 
of  the  road.  Every  railroad  report  contains  a 
statement  of  miles  of  road,  first,  second,  third 
and  fourth  tracks  and  sidings,  and  also  the 
mileage  operated,  controlled  and  leased  or  in 
any  other  way  connected  with  the  company. 
A  complete  report  should  also  show  in  detail, 
or  at  least  by  the  aid  of  a  map,  the  exact  loca- 
tion of  each  division.    In  the  case  of  the  Nor- 


78     ART  OF  WALL  STREET  INVESTING 

folk  &  Western  Railway  this  is  done  very 
satisfactorily,  thus  showing  the  character  of 
territory  through  which  the  road  runs.  A 
satisfactory  map  will  also  show  the  connec- 
tions with  other  lines,  in  most  cases  an  item  of 
very  great  value  and  importance.  These  facts, 
considered  in  connection  with  the  character  of 
the  contiguous  and  covered  territory,  are  of 
the  first  importance.  It  is  a  factor  of  great 
value  to  know  whether  the  territory  and  ter- 
minal surroundings  are  such  as  to  be  likely  to 
appreciate  in  value  through  general  influx  of 
population,  development  of  manufacturing  and 
of  agriculture,  or  the  reverse.  Valuable  char- 
acteristics of  the  Norfolk  &  Western  system 
are  its  terminals  and  connections  both  east 
and  west.  It  runs  partially  through  a  sparse 
territory  but  is  one  of  the  soft  coal  carrying 
roads,  and  its  branches  into  the  soft  coal  fields 
of  Virginia  and  West  Virginia  are  of  the  first 
importance,  and  are  likely  to  grow  in  value  as 
the  years  go  by,  largely  because  of  the  char- 
acteristic of  exclusiveness.  The  Reading  Com^- 
pany's  system  also  enjoys  similar  characteris- 
tics. Its  many  lines,  while  enjoying  important 
connection  and  terminal  advantages,  would 
not  be  in  any  sense  so  valuable  were  it  not 
for    its    dominating    influence    in    the    hard 


ANALYZING  RAILROAD  SECURITIES     79 

coal  fields  of  Pennsylvania.  In  controlling  the 
coal  output  it  has  a  practically  exclusive  ad- 
vantage which  goes  a  long  way  in  adding 
value  to  its  securities.  Without  this  special 
characteristic  it  is  not  at  all  likely  that  the 
Reading  Railroad  lines  would  be  on  anything 
like  the  same  secure  basis  that  they  are  today. 
If  the  coal  fields  were  accessible  to  actually 
competing  lines,  it  is  very  clear  that  the  Read- 
ing Railway  earnings  v^^ould  be  seriously  and 
permanently  affected. 

In  the  matter  of  terminals  and  connections, 
the  Reading  Company  is  on  a  somewhat  differ- 
ent basis  than  the  Norfolk  &  Western.  The 
latter  extends  from  Columbus,  Ohio,  to  Nor- 
folk, Virginia,  and  the  terminals  are  actually 
owned  by  the  company.  Up  to  recent  years 
the  Reading  system  had  no  entrance  of  its  own 
into  New  York  City,  but  since  1899  it  has 
controlled  the  New  Jersey  Central  lines  with 
the  latter's  important  and  rapidly  appreciating 
New  York  terminals.  Because  of  the  latter, 
joined  with  its  Philadelphia  terminals  and  its 
various  alliances  with  other  lines,  the  Reading 
properties  have  shown  enormous  appreciation 
in  value  and  earning  power  during  the  past  few 
years;  and  it  is  clearly  evident  that  the 
tendency  will  continue  as  long  as  the  condi- 


8o      ART  OF  WALL  STREET  INVESTING 

tions  of  control  of  territory  and  terminals  re- 
main the  same.  There  is  practically  no  factor 
so  important  in  a  railroad  property  as  exclu- 
sive rights  of  way  or  terminal  facilities,  or  the 
exclusive  control  through  location,  and  so 
forth,  of  a  necessary  commodity,  such  as  is 
anthracite  coal  in  the  Eastern  states  of  our 
country. 

It  will  thus  be  seen  that  the  location  and 
character  of  territory  of  the  Norfolk  &  West- 
ern and  Reading  systems  is  a  factor  of  great 
importance,  and  should  be  analyzed  before 
anything  else.  The  length  of  line  and  char- 
acter of  construction  should  then  be  examined, 
as  may  very  easily  be  done  with  the  aid  of  the 
company  reports. 

The  volume  and  character  of  business  of 
course  comes  under  the  head  of  physical  char- 
acteristics, and  should  be  jointly  considered  in 
the  examination  of  the  location  of  the  roads.  As 
is  well  known,  the  carriage  of  freight  is  the 
important  item  on  every  railroad,  and  the  best 
railroads  state  in  detail  the  character  of  ton- 
nage, with  the  total  amount  and  percentage 
of  each  class  of  freight.  The  importance  of 
these  facts  is  most  obvious.  Where  a  railroad 
is  dependent  for  its  income  largely  on  some 
special  productive  manufacture,  such  as  grain, 


ANALYZING  RAILROAD  SECURITIES    8i 

coal,  iron  or  other  special  commodities,  it  is 
naturally  subject  to  any  special  condition 
which  may  from  time  to  time  affect  that  class 
of  tonnage.  Thus,  in  the  case  of  the  coal  strike 
the  Reading  Company's  earnings  were  very 
seriously  affected ;  in  the  case  of  a  crop  failure, 
such  roads  as  the  Northern  Pacific,  Chicago, 
Burlington  &  Quincy  or  Rock  Island  would 
feel  the  effect  to  a  marked  degree.  The  char- 
acter of  the  tonnage,  therefore,  should  be  ana- 
lyzed in  connection  with  its  stability,  durability 
and  possible  fluctuation. 

'  In  examining  the  volume  of  tonnage,  the 
mere  gross  amounts  of  freight  carried  may 
mean  very  little.  Traffic  density  should  be 
ascertained,  for  both  freight  and  passengers. 
Most  railroad  reports  give  the  number  of  tons 
carried  one  mile  and  the  number  of  passengers 
carried  one  mile,  with  the  average  rate  received 
per  ton  and  per  passenger.  By  dividing  this 
ton  mileage  by  the  whole  number  of  miles 
operated,  we  get  the  freight  density^  which  is 
the  number  of  tons  carried  one  mile  per  mile 
of  road.  By  the  same  method  we  ascertain  the 
number ''of  passengers  carried  one  mile  per 
mile  of  road,  this  being  the  passenger  density. 
Considered  together,  these  two  items  make 
what  is  known  as  the  traffic  density,  and  their 


82      ART  OF  WALL  STREET  INVESTING 

chief  importance  lies  in  the  fact  that  they  show 
the  volume  of  business  done  by  the  road  very 
closely,  and  also  enable  one  to  make  accurate 
comparison  v^uth  the  volume  and  character  of 
business  done  by  other  roads.  If  the  proper 
figures  are  furnished  it  is  a  comparatively  sim- 
ple matter  to  sub-divide  the  freight  density  of 
the  various  important  classes  of  traffic. 

Train  mileage  figures  are  also  important  to 
know.     By    them    is    shown    the    volume    of 
freight  and  number  of  passengers  carried  on  an 
average  in  each  train.    Some  reports  show  the 
average  tons  and  passengers  per  ton  mile,  but 
where  they  do  not  they  can  be  ascertained  by 
dividing  the  tons  and  passengers  carried  one 
mile  by  the  freight  and  passsenger  train  mile- 
age respectively.     A  good  report  should  also 
show  the  average  number  of  cars  empty  and 
loaded  in  each  freight  train  as  well  as  passen- 
gers in  each  passenger  train,  and  the  average 
amount  of  freight  and  number  of  passengers 
in    each    car.     These    figures    are    important, 
especially  when  examined  in  comparison  with 
the  same  figures  of  previous  years,  and  also 
with  current  figures  of  other  roads.     If  there 
is  a  large  haulage  of  empty  cars  it  indicates 
insufficient   equipment   or   poor  management. 
If  the  tonnage  per  train  is  small,  it  indicates 


ANALYZING  RAILROAD  SECURITIES    83 

poor  locomotives,  bad  roadway,  weak  equip- 
ment or  short  sighted  or  neglectful  manage- 
ment. 

By  examination  in  a  comparative  way  of  all 
such  figures  as  these,  together  with  weight  of 
rails,  character  of  road  bed,  etc.,  we  get  at  the 
real  physical  condition  of  the  road,  which  is, 
as  pointed  out  above,  a  matter  of  very  great 
moment  in  an  analysis  of  the  property  and  its 
securities. 

The  volume  and  description  of  equipment 
comes  under  the  head  of  "physical  character- 
istics'* also.  A  good  railroad  report  will  show 
the  number  of  locomotives,  their  average 
weight  and  age,  and  also  the  quantity  and 
character  of  each  kind  of  car  owned  by  the 
company.  These  figures  are  particularly  im- 
portant nowadays  and  should  be  given  in  a 
clear  and  exhaustive  manner,  for  the  reason 
that  such  vast  development  has  taken  place 
in  the  capacity  of  locomotives  and  freight  cars 
during  the  past  few  years,  that  mere  numbers 
may  be  very  misleading.  In  the  matter  of  coal 
cars,  for  instance,  great  strides  have  been  made 
in  the  size  and  capacity  per  car,  so  that  a  road 
might  today  own  but  1,000  coal  cars,  the  capac- 
ity of  v/hich  might  exceed  that  of  3,000  cars 
of  twenty  years  ago.  Hence,  clear  and  detailed 


84     ART  OF  WALL  STREET  INVESTING 

descriptions  of  equipment  should  always  be 
given. 

The  equipment  figures  should  be  studied  in 
comparison  with  those  of  previous  years  in 
order  to  be  read  aright.  This  is  easily  done  in 
the  cases  of  the  Norfolk  &  Western  and  Read- 
ing Company  reports. 

2.  Earning  Power.  Having  familiarized 
oneself  with  the  physical  characteristics  of  a 
road  as  outlined  in  the  foregoing  pages,  the 
next  step  for  the  investor  or  student  to  take 
is  to  ascertain  and  then  analyze  the  earning 
power  of  the  property.  This  is  done  through 
an  examination  and  analysis  of  the  income  or 
revenue  account.  Every  report  of  course  con- 
tains such  an  account,  and  it  is  often  the  most 
conspicuous  statement  published  in  the  report. 
Usually  it  is  too  much  condensed,  but  some- 
times is  presented  with  satisfactory  detail.  For 
the  sake  of  simplicity  there  is  presented  below 
a  sample  of  the  usual  form,  omitting  all  detail, 
as  applied  to  a  railroad  system  of  600  miles  in 
length. 


ANALYZING  RAILROAD  SECURITIES    85 

P«r  mile. 
Gross  earnings  from  operation  $12,000,000  $20,000 
Operating  expenses    8,000,000        13.333 

Net  earnings  4,000,000  6,667 

Other  income   250,000  417 

Total  income    4,250,000  7,084 

Fixed   charges    3,250,000  5,418 

Balance    1,000,000  1,666 

Dividends   600,000  1,000 

Surplus    400,000  666 

The  income  from  a  railroad  is  chiefly  from 
operation,  but  a  portion  may  also  arise  from 
interest  on  investments  or  loans  or  income 
from  rentals.  The  gross  income  from  opera- 
tion embraces:  (a)  revenue  from  passenger 
transportation ;  (b)  revenue  from  freight  trans- 
portation; (c)  revenue  from  mail,  expressage, 
storage,  etc.;  (d)  revenue  from  car  mileage, 
switching,  etc.;  (e)  revenue  from  telegraph 
com.panies. 

The  income  from  all  these  items  should,  of 
course,  be  shown  in  gross,  and  the  laws  of  the 
states  usually  so  require  it.  Rebates,  being 
illegal,  should  not  be  included  in  operating  ex- 
penses, but  should  in  all  cases  where  they  exist 
be  deducted  from  gross  earnings.  Such 
charges  as  commissions  should  naturally  go 
into  operating  expenses.    In  nearly  all  reports 


86      ART  OF  WALL  STREET  INVESTING 

the  revenue  from  these  several  different 
sources  is  given  separately,  and  the  figures  are 
easily  understood  and  compared.  There  is  lit- 
tle room  here  for  mistakes  or  inaccuracies. 

Separate  statements  of  incomes  of  leased 
properties  should  be  given  in  railroad  reports 
having  such  sources  of  income,  while  that  of 
all  proprietary  branches  or  lines  should  natu- 
rally be  included  in  the  general  income  ac- 
count. 

Operating  expenses  is  the  one  item  in  a  rail- 
road report  which  should  always  be  examined 
with  the  greatest  care.  It  is  the  account  most 
readily  manipulated,  and  through  its  dissection 
one  can  most  clearly  judge  the  character  and 
management  of  the  property.  To  this  account 
the  company  should  charge  all  expenditures 
necessary  to  carry  on  the  business  of  the  road 
and  leave  the  property  at  the  end  of  the  year 
in  fully  as  good  condition  as  it  was  at  the 
beginning  of  the  year.  Actual  improvements 
to  the  property  may  be  charged  to  the  capital 
or  construction  account. 

Operating  expenses  are  divided  into  four 
classes:  (a)  maintenance  of  way  and  struc- 
tures ;  (b)  maintenance  of  equipment ;  (c)  con- 
ducting transportation;  (d)  general  expenses. 
The   Interstate   Commerce    Commission   long 


ANALYZING  RAILROAD  SECURITIES     87 

ago  officially  classified  operating  expenses  in 
this  way,  and  also  sub-divided  each  of  these 
classes  into  more  than  fifty  sub-divisions. 

Maintenance  of  way  and  structures,  as  its 
title  indicates,  embraces  all  charges  made  in 
connection  with  keeping  up  to  the  proper 
standard  the  roadway,  buildings,  etc.  It  is 
properly  divided  as  follows:  (i)  repairs  of 
roadway;  (2)  renewals  and  repairs  of  rails  and 
ties;  (3)  renewals  and  repairs  of  stations, 
crossings,  culverts,  buildings,  bridges,  docks, 
wharves,  fences,  etc. 

Repairs  of  roadway  embraces  cost  of  ballast, 
clearing  of  tracks  from  snow  and  ice,  re-ballast- 
ing of  tracks  and  wages  and  supplies  pertaining 
to  this  department.  Renewals  and  repairs  of 
rails  and  ties  cover  all  cost  of  new  rails  and  ties 
and  the  laying  of  same.  Some  companies 
charge  to  construction  account  the  entire  cost 
of  nev/  rails,  less  the  amount  for  v/hich  the  old 
rails  may  be  sold.  But  this  method  is  not  cor- 
rect. Properly  the  company  should  charge  to 
construction  account  only  the  amount  received 
for  the  old  rails,  the  difference  being  charged 
to  the  maintenance  account.  All  railroads  find 
it  necessary  to  replace  a  certain  proportion  of 
rails  each  year,  and  this  practice  should  not  be 


S8     ART  OF  WALL  STREET  INVESTING 

neglected.  The  other  items  in  the  maintenance 
account  are  largely  self-explanatory. 

Maintenance  of  equipment  refers  entirely 
to  engines  and  cars.  This  account  should  be 
charged  with  all  money  spent  to  keep  the 
company's  rolling  stock  in  fully  as  good  and 
effective  condition  as  it  was  at  the  beginning 
of  the  year.  Some  companies,  instead  of  mak- 
ing proper  replacement  out  of  earnings,  will 
allov/  equipment  to  depreciate  and  in  time  be 
destroyed  and  then  replace  it  out  of  capital  ac- 
count. Companies  also  sometimes  postpone 
these  renewals  or  repairs.  Such  customs  are 
to  be  condemned  and  careful  comparative  ex- 
aminations should  be  made. 

Conducting  transportation  embraces  all  ex- 
penses incident  to  hauling  or  transporting 
freight  or  passengers.  It  includes  many  items 
such  as  salaries  and  wages  of  all  employees 
who  are  engaged  in  the  actual  operation  of  the 
road,  and  all  supplies  used  for  this  particular 
purpose. 

General  expenses  include  salaries  of  officers, 
legal  expenses,  insurance^  etc.,  and,  of  course, 
are  usually  much  smaller  in  amount  than  the 
figures  in  the  other  divisions  mentioned  above. 

Fixed  charges  usually  include  taxes,  inter- 
est on  funded  and  floating  debt,  rentals  and 


ANALYZING  RAILROAD  SECURITIES    89 

sinking  funds.  Taxes  should  properly  be  in- 
cluded in  operating  expenses,  but  in  the  major- 
ity of  cases  they  are  placed  in  fixed  charges. 
It  makes  little  difference,  provided  they  are 
clearly  and  separately  stated,  but  it  often  mis- 
leads the  superficial  investor  if  they  are  not 
deducted  before  "net  earnings"  are  announced, 
as  he  is  prone  to  forget  that  the  frequently 
large  item  of  "taxes"  must  be  taken  out  before 
interest  and  dividends.  This  often  happens  in 
examining  the  monthly  and  quarterly  earnings 
statements  given  out  to  the  nev/s  agencies  and 
papers  by  the  companies. 

Interest  on  funded  and  floating  debt  should 
be  stated  clearly  and  in  detail,  and  in  connec- 
tion vvith  it  should  be  given  a  list  of  the  kinds 
and  am.ounts  of  bonds  outstanding,  with  the 
interest  charge  thereon,  and  also,  if  possible, 
the  character  of  their  particular  lien,  showing 
which  are  prior  in  security  to  the  others,  etc. 
Rentals  should,  of  course^  be  stated  in  detail 
and  so  should  sinking  funds.  After  all  these 
items  are  deducted,  including  special  charges, 
if  there  are  any,  the  balance  is  "surplus,"  the 
division  of  which  is  in  the  province  of  the 
stockholders.  It  is  the  net  profit  of  the  con- 
cern, and  out  of  it  are  paid  the  dividends  on  the 
stocks  of  the  company.     What  remains  after 


go      ART  OF  WALL  STREET  INVESTING 

dividends  are  deducted  is  net  surplus  and  is 
usually  added  to  a  "profit  and  loss"  or  ^'surplus 
income  account." 

Examination  of  this  "income  statement"  fur- 
nishes the  information  necessary  to  know  the 
"earning  power"  of  the  railroad.  By  the  re- 
duction to  a  "per  mile  basis"  comparisons  with 
other  roads  doing  the  same  class  and  char- 
acter of  business  is  readily  made. 

3.  Financial  Characteristics.  Having  famil- 
iarized oneself  with  the  physical  and  earning 
power  of  a  railroad  property,  the  next  step  is 
to  examine  its  financial  side.  This  is  taken  up 
through  the  analysis  of  the  company's  balance 
sheet.  Practically  nothing  can  be  known  of  a 
railroad's  financial  condition  unless  the  finan- 
cial statement  or  balance  sheet  is  carefully 
examined  and  dissected. 

The  balance  sheet  consists  of  a  statement  of 
the  company's  assets  and  liabilities  in  con- 
densed form.  It  embraces  the  follov/ing  sub- 
jects: Capital  assets;  current  assets;  capital 
liabilities;  current  liabilities;  profit  and  loss, 
the  latter  being  either  a  deficit  or  surplus,  as 
the  case  may  be.  Some  roads  condense  their 
balance  sheet  entirely  too  m.uch  v/hen  insert- 
ing it  in  the  annual  report  while  others  do  not 
condense  enough.    In  many  cases  also  the  mis- 


ANALYZING  RAILROAD  SECURITIES    91 

take  is  made  of  not  being  explicit  and  clear 
enough  in  the  insertion  of  items. 

Capital  assets  consists  of:  (a)  property  and 
franchises,  equipment  and  plant,  usually  car- 
ried under  the  title  of  "Cost  of  road  and  equip- 
ment"; this  is  commonly  known  as  the  con- 
struction account ;  (b)  investments  in  securities 
and  real  estate ;  (c)  sinking  fund  accounts. 

The  construction  account  is  supposed  to  rep- 
resent the  total  amount  of  capital  invested  in 
the  road  and  its  equipment.  It  is  frequently 
the  case,  however,  that  certain  other  items, 
such  as  discounts  on  securities  sold,  are 
charged  to  this  account.  This  account  also 
usually  takes  care  of  special  charges  and  ex- 
penses made  in  the  financing  of  capital  issues, 
reorganizations  of  the  property,  and  so  forth. 
The  account  is  in  a  sense  rather  an  elastic  one 
and  the  charges  in  it  are  capable  of  great  mis- 
use. Properly  the  railroad  should  itemize  the 
charges  which  are  made  to  this  account  during 
the  year,  in  order  that  the  stockholders  may 
knov/  exactly  how  to  account  for  the  increases 
which  may  appear.  If  this  were  always  done  it 
would  not  be  possible  for  any  railroad  manage- 
ment to  juggle  with  this  account  as  is  some- 
times done.  There  have  been  instances  in  the 
past  where  the  construction  account  has  been 


92     ART  OF  WALL  STREET  INVESTING 

made  the  receptacle  for  all  sorts  of  items  repre- 
senting little  or  no  value.  For  instance,  in  the 
case  of  the  old  Atchison  Railroad,  reorganized 
in  1895,  it  was  found  that  out  of  a  construction 
account  carried  in  the  balance  sheet  at  over 
$95,000,000,  more  than  $40,000,000  represented 
nominal  entries  such  as  discounts  on  bonds, 
reorganization  expenses,  ttc. 

"Investments  in  securities  or  real  estate"  is 
not  as  clearly  shown  in  most  railroad  reports 
as  it  should  be.  All  the  large  roads  own  vari- 
ous stocks  and  bonds  of  other  roads,  which 
have  been  acquired  in  many  ways;  sometimes 
by  direct  purchase  or  control,  by  original  sub- 
scription, by  exchange  of  securities,  or  in  pay- 
ment of  advances  made  or  construction  work 
done.  If  these  items  were  made  explicit 
enough  it  would  be  a  comparatively  easy  mat- 
ter to  ascertain  whether  they  were  being  car- 
ried at  too  high  a  valuation  in  the  balance 
sheet.  In  addition  to  this,  it  is  necessary  to 
compare  these  items  in  connection  with  the 
item  on  income  from  investments  in  the  income 
account.  It  can  be  fairly  well  ascertained  by 
such  a  comparison  what  the  real  value  of  the 
investments  are  and  whether  they  are  over- 
valued in  the  balance  sheet.  There  are  cases, 
of  course,  where  one  railroad  property  will  ac- 


ANALYZING  RAILROAD  SECURITIES    93 

quire,  for  control  in  a  strategical  sense,  the 
securities  of  another  property  and  not  merely 
for  the  income  to  be  derived  directly  therefrom. 
But  when  this  is  the  case,  it  is  usually  so  evi- 
dent that  it  is  not  necessary  to  have  it  stated 
explicitly. 

Sinking  funds  should  be  shown  in  the  bal- 
ance sheet  in  detail;  showing  each  kind  of  sink- 
ing fund  and  bond  separately.  Car  trust  pay- 
ments, v/here  there  are  any,  should  be  treated 
in  the  same  general  manner. 

The  current  assets  of  a  company  include  all 
movable  and  changable  assets  excepting  mate- 
rial supplies,  which  may  be  in  use  for  the  pur- 
pose of  liquidating  the  general  business  debts 
of  the  company,  independent  of  the  capital 
assets.  The  main  headings  under  current  as- 
sets are :  (a)  cash  on  hand  and  on  deposit ;  (b) 
loans  and  bills  receivable ;  (c)  accounts  receiv- 
able; (d)  due  from  other  companies  and  indi- 
viduals; (e)  due  from  companies,  agents  and 
officers;  (f)  advances  to  other  companies:  (g) 
sundry  assets. 

The  item  "cash,"  of  course  explains  itself. 
Loans  and  bills  receivable  is  not  ordinarily  a 
large  account.  It  represents  money  owed  by 
shippers  for  freight  transported,  and  so  forth, 
and  may  also  represent  loans  made  by  the  road 


94     ART  OF  WALL  STREET  INVESTING 

or  notes  held  by  the  road.  If  the  item  of 
*'loans"  increases  from  year  to  year  it  is  not  a 
good  thing,  unless  there  are  special  reasons 
given  for  it.  "Accounts  receivable"  explain 
themselves,  as  does  the  item  due  from  other 
companies  and  individuals.  "Advances  to 
other  companies,"  if  large,  should  be  carefully 
examined.  It  may  mean  money  loaned  by  the 
company  to  some  weak,  struggling  allied  com- 
pany whose  bonds  may  be  guaranteed  by  the 
main  company,  or  of  which  control  is  held  in 
some  way.  These  advances  may  be  small  and 
therefore  only  nominal,  but  if  they  continue  to 
grow  it  may  mean  that  the  parent  company 
is  advancing  money  which  may  never  come 
back  to  it  at  all.  The  chief  importance  of  the 
item  lies  in  the  change  it  may  produce  on  the 
other  side  of  the  balance  sheet. 

.The  items,  "due  from  agents  and  officers," 
and  "sundry  assets,"  explain  themselves.  The 
smaller  they  are  kept  from  month  to  month 
and  year  to  year,  the  healthier  the  condition  of 
the  road  is  apt  to  be. 

"Capital  liabilities"  consists  of  stocks  and 
bonds  only.  There  are  several  kinds  of  stock 
and  many  kinds  of  bonds  which  require  no 
description  here,  as  they  have  been  especially 
considered    in    Chapters    II    and    III.    The 


ANALYZING  RAILROAD  SECURITIES    95 

balance  sheet  should  show  the  actual  amount 
of  capital  stock  outstanding,  whether  owned 
by  the  company  or  not.  If  the  company  has 
any  of  this  stock  in  its  treasury,  this  latter 
should  be  shown  as  an  asset  on  the  other  side 
of  the  balance  sheet.  The  various  kinds  of 
bonds  should  be  separately  shown,  the  actual 
amount  outstanding  being  given  in  each  case. 
By  comparing  these  amounts  with  those  of 
previous  years,  the  changes  and  increases  can 
be  readily  ascertained.  In  m.ost  railroad  re- 
ports, separate  detailed  statements  are  fur- 
nished describing  the  funded  debt,  and  in  some 
cases  showing  the  actual  property  on  which  the 
different  mortgages  are  secured. 

"Current  liabilities"  are  made  up  of  several 
important  items  which  usually  come  under  the 
following  heads:  (a)  loans  and  bills  payable; 
(b)  accounts  payable ;  (c)  pay  rolls  and  vouch- 
ers; (d)  interest  and  dividends  accrued;  (e) 
due  to  other  companies;  (f)  sundry  liabilities. 
These  items  are  generally  sub-divided  into 
"floating  debt"  and  "operating  liabilities."  The 
"operating  liabilities"  are  generally  purely  cur- 
rent, and  do  not  usually  represent  more  than 
one  or  two  months  items.  If  they  extend  much 
beyond  this,  it  is  often  the  case  that  the  road 
is  running  behind  and  its  management  is  in  a 


96     ART  OF  WALL  STREET  INVESTING 

bad  way.  The  important  item  to  be  examined 
in  current  liabilities  is  "loans  and  bills  pay- 
able." If  this  item  is  small  and  does  not 
grow  from  year  to  year  it  may  mean  very  lit- 
tle. If  it  does  grow,  however,  it  usually  means 
that  the  company  is  borrowing  money  tempo- 
rarily for  construction  or  improvements  which 
it  intends  to  take  care  of  with  some  permanent 
security,  such  as  stock  or  bonds;  later  on. 
If  this  is  not  the  case  and  no  new  work  is  being 
undertaken,  then  it  surely  means  that  there 
will  be  trouble  ahead.  It  is  better  if  a  railroad 
has  no  loans  or  bills  payable,  and  in  normal 
times  a  well-managed  property  will  not  allow 
this  item  to  expand,  even  if  it  is  doing  a  good 
deal  of  building.  It  will  generally  be  found 
more  economical  to  finance  its  capital  require- 
ments as  it  goes  along. 

The  item  "accounts  payable"  is  not  signifi- 
cant unless  it  shows  rapid  increase  in  amount. 
This  is  also  true  of  other  items,  such  as  pay- 
rolls and  vouchers,  traffic  balances,  etc.  The 
item  "interest  or  dividends  accrued"  is  gener- 
ally off-set  by  "current  assets"  on  the  other 
side  of  the  balance  sheet. 

In  addition  to  the  item.s  in  the  balance  sheet 
mentioned  above  there  is  always  the  one  item 
of  "profit  and  loss,"  or  "surplus,"  which  is 


ANALYZING  RAILROAD  SECURITIES    97 

always  found  on  the  liability  side,  when  the 
company  is  in  sound  condition.  Theoretically, 
it  represents  an  actual  surplus,  but  as  a  matter 
of  fact,  it  does  not  always  represent  this,  as  the 
money  supposed  to  be  contained  in  the  account 
is  usually  absorbed  somewhere  else  in  the  ac- 
counts of  the  company. 

In  the  foregoing  chapter  the  chief  points 
in  a  railroad  report  have  been  referred  to. 
Very  few  railroads  give  all  the  essential  facts 
as  clearly  as  they  should;  this  being  particu- 
larly true  of  the  physical  characteristics. 
There  are,  however,  various  ways  by  which 
the  investor  can  ascertain  many  facts  regard- 
ing the  physical  status  of  a  railroad  outside  of 
an  annual  report.  As  for  the  financial  statis- 
tics, it  is  nowadays  a  comparatively  simple 
matter  for  anyone  to  secure  the  necessary 
facts  regarding  any  railroad  in  the  country, 
large  or  small,  through  the  Interstate  Com- 
merc  Commission  of  Washington.  The  only 
drawback  of  this  method  is  that  the  reports 
of  the  Department  are  not  made  up  promptly 
enough  for  the  use  of  many  prospective  invest- 
ors. 


Tractions  and  Industrials 

THhE  investment  market  for  industrial  and  ^ 
^      traction  securities  has  undergone  a  vast    ' 
development  in  Wall  Street  during  the  past 
half  dozen  years.    Previous  to  that  time  a  thor- 
ough discussion  of  Wall  Street  could  be  made 
without  any  particular  reference  to  this  sub- 
ject, but  nowadays  a  large  proportion  of  the  \ 
transactions  there  are  in  either  industrial  secur- 
ities or  those  of  the  various  public  service  cor- 
porations.    There  are  certain  features  under- 
lying traction  or  other  franchise  corporation 
securities  which  do  not  affect  railroad  securi- 
ties to  any  extent.    It  is  true  that  steam  rail- 
roads are  in  a  broad  sense  "franchise"  corpor- 
rations,  but  the  franchise  is  not  the  important 
feature  as  it  is  in  the  case  of  a  street  railway, 
gas,  electric  light  or  water  company.     In  the 
promoting  or  developing  of  any  of  these  the 
franchise  is  regarded  as  the  fundamental  thing 
and  without  it  no  company  can  operate  at  all. 

99 


100   ART  OF  WALL  STREET  INVESTING 

In  the  case  of  the  street  railway  the  fran- 
chise does  not  usually  merely  authorize  the 
company  to  construct  a  railroad  through  a 
piece  of  property  after  it  has  bought  that  prop- 
erty, as  does  the  steam  railroad  franchise,  but  it 
conveys  to  the  corporation  the  exclusive  right 
to  operate  over  public  property  for  a  certain 
term  of  years ;  perhaps  for  an  unlimited  period 
of  time.  A  franchise  of  this  kind  does  not 
merely  give  a  company  a  legal  right  to  con- 
struct and  operate,  but  it  gives  it  a  more  or  less 
exclusive  right;  and  on  the  value  of  this  privi- 
lege, whatever  it  may  be,  depends  entirely  the 
value  of  the  securities  which  are  built  upon  it. 
In  examining,  from  the  investor's  standpoint, 
the  bonds  or  stock  of  a  franchise  or  public  util- 
ity corporation,  we  should  before  all  else  exam- 
ine the  franchise.  To  do  this  we  must  ascertain 
its  length,  its  scope,  the  terms  or  conditions  of 
its  renewal,  and  its  limitations,  if  it  has  any. 
We  must  also  bear  in  mind  and  carefully  weigh 
the  character  of  the  community  which  grants 
the  franchise,  and  not  overlook  the  possible 
effect  of  change  in  public  sentiment.  While  a 
city  or  other  municipality  cannot  as  a  rule  can- 
cel a  franchise  which  has  been  legally  granted, 
and  with  the  terms  of  which  the  company  has 
complied,  yet  there  are  methods  whereby  the 


TRACTIONS  AND  INDUSTRIALS        loi 

community  can,  if  it  so  elect,  take  to  itself, 
through  taxation,  what  is  generally  termed  the 
"unearned  increment"  in  the  franchise.  For 
instance,  a  city  may  by  legislation  limit  the 
rate  of  fare  which  the  company  may  be  allowed 
to  charge ;  it  may  insist  upon  a  transfer  system 
which  will  tend  to  reduce  the  income  of  the 
railroad;  it  may  adopt  a  franchise  tax  law  re- 
quiring the  company  to  pay  into  the  city's 
treasury  a  certain  proportion  of  its  earnings 
in  addition  to  the  amount  paid  for  ordinary 
taxes.  This  feature  of  the  franchise  question 
is  coming  to  the  front  very  rapidly  nowadays 
and  it  is  quite  necessary  for  the  intelligent 
investor  to  be  thoroughly  informed  along  this 
line..  The  franchise  corporations  are  purely 
modern  institutions,  and,  like  the  industrials, 
have  nearly  all  been  organized  on  a  more  or 
less  inflated  basis.  For  instance,  the  various 
properties  owned  and  controlled  by  the  New 
Jersey  Public  Service  Corporation  are  capital- 
ized for  over  $210,000,000,  and  yet  they  could 
probably  be  replaced,  aside  from  the  franchise 
values,  for  less  than  $80,000,000.  The  differ- 
ence, of  course,  is  supposed  to  represent  the 
actual  value  of  the  franchises,  and  as  these 
values  are  in  most  cases  very  tangible  and 
growing  rapidly,  it  is  claimed  that  they  should 


102    ART  OF  WALL  STREET  INVESTING 

be  represented  by  a  reasonable  amount  of 
securities.  The  danger  in  this  argument,  how- 
ever, from  the  investor's  standpoint,  lies  in  the 
fact  that  the  communities  themselves  all  retain 
the  taxing  power  and  have  a  perfect  right,  if 
public  opinion  so  elects,  to  tax  into  the  public 
treasury  the  entire  value  of  these  franchises. 
Should  this  program  be  generally  pursued 
throughout  the  country  it  will  readily  be  seen 
that  both  bonds  and  stocks  of  traction  and 
other  public  service  companies  which  merely 
represent  this  current  franchise  value,  will 
largely  evaporate  into  nebulous  ether. 

Industrial  s  purities  are  similar  to  tractions 
in  many  ways.  They  also  depend  more  or  less 
on  a  franchise  right  or  on  some  special  legisla- 
tion, which  gives  them  a  benefit  which  they 
have  capitalized.  In  the  case  of  the  United 
States  Steel  Corporation,  for  instance,  not  only 
has  the  actual  cost  of  the  manufacturing  prop- 
erties been  fully  capitalized,  but  the  company 
has  issued  large  amounts  of  securities  to  repre- 
sent the  estimated  values  of  its  ore  and  coal 
lands  ten  or  twenty  years  in  the  future  and  has 
also  capitalized  in  a  very  liberal  manner  the 
special  benefits  which  it  enjoys  because  of  pro- 
tective tariff  legislation,  patent  fights,  shipping 
facilities,  contracts,  etc.     These  things,  while 


TRACTIONS  AND  INDUSTRIALS        103 

apparently  permanent  enough  at  the  present 
time,  are  still  not  fundamental  values  and  can 
easily  be  removed  through  the  force  of  public 
sentiment.  Not  only  may  these  special  advan- 
tages be  removed,  but  the  people  may  some  day 
decide  to  clap  heavy  taxes  on  ore,  coal  and 
other  lands  now  taxed  but  lightly. 

This  is  not  true,  however,  of  the  steam  rail- 
road advantages,  which  are  chiefly  made  up  of 
rights  of  way  and  terminals  which  originally 
were  of  not  much  importance,  but  which  have 
shown  enormous  appreciation  in  value  because 
of  the  great  influx  of  population  and  general 
development  of  the  country  during  recent 
decades.  While  the  steam  railroads  are  to  a 
degree  subject  to  legislative  regulation  and  tax- 
ation, yet  the  special  advantages  which  they 
enjoy  are  so  much  more  firmly  secured  than 
those  of  the  traction  and  industrial  companies, 
that  danger  of  any  real  and  serious  disturbance 
of  these  advantages  is  comparatively  remote. 
It  is  true  that  sentiment  is  growing  more  or 
less  rapidly  nowadays  in  favor  of  government 
control  or  ownership  of  steam  railroads,  but  it 
is  not  likely  that  the  latter  will  be  brought 
about  in  a  way  which  will  be  particularly  detri- 
mental to  the  interest  of  the  holders  of  any- 
thing but  the  most  inferior  classes  of  railroad 


104    ART  OF  WALL  STREET  INVESTING 

securities.  Masses  of  traction  and  industrial 
securities  are  vulnerable  because  of  the  fact 
that  such  a  large  proportion  of  them  are  based 
on  purely  speculative  foundations,  v/hile  the 
majority  of  railroad  securities  represent  much 
more  real  value,  which  has  been  created  in  one 
way  or  another  over  a  longer  period  of  time, 
and  is  much  more  certain  of  permanency. 

In  judging  industrial  and  traction  securities, 
therefor,  the  methods  which  have  been  out- 
lined in  other  chapters  for  the  analysis  of  steam 
railroad  securities  should  be  applied  only  in  a 
very  qualified  sense.  The  features  pointed  out 
above  should  be  constantly  borne  in  m.ind  as 
the  most  important  factors  which  are  likely  to 
affect  the  present  or  future  values  of  the  securi- 
ties. 


VI 

Investment  versus  Speculation 

^  I  ^HERE  are  two  classes  of  people  in  Wall 
^  Street  who  invest  money  in  securities. 
One  class  consists  of  actual  investors.  The 
actual  investor  is  the  man  who  invests  for  him- 
self and  buys  securities  to  keep.  Ke  either 
does  this  directly  or  does  it  through  a  bond 
dealer  or  other  broker  in  securities.  When  the 
dealer  buys  securities  he  has  certain  motives 
which  the  investor  himself  has  not,  and  in  mak- 
ing his  purchases  takes  certain  other  factors 
into  consideration.  The  individual  investor 
does  not  give  much  thought  to  the  temporary 
condition  of  the  market,  and  it  does  not  matter 
much  to  him  what  the  temporary  course  of 
prices  may  be.  But  the  broker  or  bond  dealer 
must  not  only  take  into  consideration  the  in- 
trinsic value  of  the  investment  itself,  but  he 
must  also  consider  the  condition  of  the  money 
market,  and  of  various  other  factors  of  a  more 
or  less  temporary  nature  which  may  affect  the 

105 


io6    ART  OF  WALL  STREET  INVESTING 

price  of  the  security.  In  other  words,  he  must 
buy  as  cheaply  as  he  can,  for  the  simple  reason 
that  he  is  not  an  investor  and  buys  simply  for 
the  purpose  of  turning  over  the  security  at  a 
profit  to  someone  else. 

The  distinction  between  these  two  men  indi- 
cates the  cardinal  distinction  between  the  in- 
vestor and  the  speculator.  While  the  bond 
dealer  is  not  a  speculator  in  the  commonly  ac- 
cepted sense,  yet  his  motive  is,  in  a  more  lim- 
ited and  conservative  way,  of  the  same  nature 
as  that  of  the  speculator.  The  latter  buys  to 
make  a  profit  on  the  principal.  The  investor 
buys  to  secure  an  income;  that  is  to  say,  he 
places  his  money  in  what  he  thinks  or  is  led  to 
believe  is  an  absolutely  secure  piece  of  prop- 
erty, and  he  has  no  other  purpose  in  view  than 
that  of  receiving  a  current  return  upon  it  in  the 
shape  of  interest  or  dividends.  Such  is  the 
pure  investor,  while  the  pure  speculator  is  one 
who  pays  no  attention  to  dividends  and  inter- 
est as  an  income,  but  is  actuated  entirely  with 
the  idea  of  profit  on  principal.  Of  course,  there 
are  many  men  who  are  both  investors  and 
speculators,  and  a  large  number  follow  the 
practice  of  putting  money  in  what  are  known 
as  semi-speculative  investments.  A  semi- 
speculative  investment  is  one  which  furnishes 


INVESTMENT  VS.  SPECULATION       107 

an  income  in  the  shape  of  dividends  or  interest, 
and  at  the  same  time  is  supposed  to  promise  a 
reasonable  appreciation  in  principal  over  a  cer- 
tain period  of  time.  For  instance,  the  man  v^ho 
puts  money  into  a  stock  like  the  United  States 
Steel  preferred,  might  reasonably  be  called  a 
semi-speculative  investor.  He  invests  not 
merely  to  get  a  liberal  dividend,  but  has  a 
theory  that  as  the  stock  is  not  selling  very  high 
there  may  be  a  fair  chance  for  appreciation  in 
the  principal,  in  the  event  of  which  he  will  sell 
out  and  re-invest  his  money  with  the  profit 
made  in  some  other  security.  While  this 
method  has  proven  successful  in  many  cases, 
yet  there  is  necessarily  a  large  element  of 
speculation  in  it  when  carried  to  an  extreme, 
for  if  a  serious  mistake  is  made  by  the  investor, 
a  large  proportion  of  his  principal  may  be 
wiped  out,  and  in  this  case  he  will  quickly  find 
that  it  would  have  been  much  wiser  for  him 
to  have  confined  himself  entirely  to  securities 
which  have  no  speculative  value,  but  are 
bought  and  sold  entirely  on  an  investment 
basis. 

In  addition  to  pointing  out  the  distinction 
between  investing  and  speculating  in  Wall 
Street,  it  is  worth  while  to  also  show  the  line 
between  speculating  and  what  is  commonly 


io8    ART  OF  WALL  STREET  INVESTING 

known  as  gambling  in  stocks.  The  man  who 
speculates  in  stocks  acts  on  information  which 
he  has  ascertained  and  analyzed  in  one  way  or 
another.  To  be  sure,  his  judgment  m.ay  be 
entirely  at  fault,  but  he  generally  has  a  plaus- 
able  business  reason  for  buying  or  selling  such 
ind  such  a  security.  For  instance,  he  may  have 
made  up  his  mind  that  a  certain  railroad  stock 
is  selling  too  low  in  view  of  current  earnings 
and  immediate  prospects,  such,  for  instance  as 
the  crop  outlook,  and  based  on  this  he  may 
decide  to  buy  for  a  rise.  This  is  generally 
known  as  a  "speculation."  A  "gamble,"  on 
the  other  hand,  is  where  a  man  buys  and  sells 
on  a  blind  chance,  without  any  particularly 
sane  reason,  except  that  he  thinks  that  a  turn 
in  the  market  up  or  down  is  due,  or  that  the 
pools  and  "big  fellows"  mean  to  give  a  twist 
to  the  stock.  A  large  portion  of  the  gambling 
is  done  in  bucket  shops,  but  a  respectable 
amount  of  it  also  finds  its  way  into  the  offices 
of  the  larger  brokers  and  commission  dealers. 
There  are  a  limited  number  of  men  who  gam- 
ble in  stocks  on  a  very  large  scale  and  some- 
times make  as  well  as  lose  very  large  amounts 
of  money.  This  is  also  true  of  the  speculative 
market,  and  nowadays  actual  speculation  in 
stocks  is  carried  on  on  an  enormous  scale,  the 


INVESTMENT  VS.  SPECULATION       109 

speculative  leaders  in  many  cases  being  some 
of  the  most  prominent  men  in  the  Street.  The 
great  aggregate  of  speculation  is  made  up  of 
these  men  with  their  many  thousands  of 
smaller  followers  in  all  parts  of  the  country. 


VII 

"Get-Rich-Quick"  Schemes 

T^HERE  are  many  methods  in  vogue  for 
^  inducing  people  to  part  with  their  money, 
but  the  most  effective  way  to  interest  a  certain 
very  considerable  portion  of  the  American  pub- 
lic in  propositions  the  ultimate  purpose  of 
which  is  the  separation  of  the  individual  from 
his  property,  is  through  what  is  known  in  Wall 
Street  as  the  "get-rich-quick'*  scheme.  It  is  an 
old  saying  that  the  American  public  likes  to  be 
fooled,  and  judging  from  the  way  these  many 
fraudulent  schemes  keep  bobbing  into  sight 
with  never  ending  regularity,  it  would  seem 
that  the  saying  has  lost  none  of  its  truthful- 
ness. 

There  are  get-rich-quick  schemes  of  many 
kinds,  and  they  are  exploited  in  many  ways; 
sometimes  through  the  columns  of  newspapers, 
sometimes  in  financial  or  mining  journals,  but 
more  often  through  circulars  or  other  advertis- 
ing matter.     The  most  successful  are  usually 

III 


112    ART  OF  WALL  STREET  INVESTING 

mining    propositions,    although    many    other 
kinds  have  flourished  equally  as  well.    One  of 
the  most  notorious  promotion  frauds  of  this 
kind  was  a  ^'guaranteed  egg  company,"  the 
stock  of  which  was  offered  for  sale  in  New 
York  City  a  few  years  ago.    The  promoters  of 
this  company  sent  broadcast  a  roseate  pro- 
spectus, offering  the  sale  of  7%  guaranteed  pre- 
ferred stock  at  par,  with  a  large  bonus  in  com- 
mon stock.    Careful  inspection  of  the  prospec- 
tus revealed  the  fact  that  the  prospective  earn- 
ings, which  were  to  amount  to  a  fabulous  sum, 
were  to  result  from  the  sale  of  eggs  at  high 
prices,  the  said  eggs  to  be  laid  without  fail  at 
a  certain  unceasing  rate  by  several  thousand 
hens,  which  were  the  entire  stock  in  trade  of 
the  company.    These  hens  were  supposed  to  do 
the  double  work  of  hatching  new  broods  of 
chickens  and  at  the  same  time  laying  their 
regular  guaranteed  proportion  of  eggs.    It  was 
also  assumed  that  only  hens  and  not  roosters 
would  be  hatched  and  that  every  egg  would  be 
good.    The  essence  of  the  "guarantee"  on  the 
preferred  stock  appeared  to  be  wholly  based  on 
the  theory  that  the  hens  had  somehow  been 
forced  into  a  promise  to  lay  eggs  night  and 
day,  if  need  be^  in  order  not  to  allow  the  pre- 
ferred stock  dividends  to  lapse  in  any  possible 


"GET-RICH-QUICK"  SCHEMES  113 

way.  The  company  was  capitalized  in  the 
neighborhood  of  a  million  dollars  and  its  only 
tangible  property,  aside  from  the  chickens,  was 
a  farm  of  twenty  acres  located  about  thirty 
miles  from  New  York. 

Absurd  as  this  whole  proposition  was,  there 
were  enough  investing  idiots  walking  around 
loose  in  New  York  City  to  "nibble"  at  this  bait 
to  the  extent  of  over  $80,000  in  cash.  And  it 
was  stated  on  good  authority  that  most  of 
these  subscriptions  came  from  New  York  City 
people  who  had  never  seen  a  chicken  farm  in 
their  lives,  and  probably  didn't  know  any  more 
about  the  chicken  and  hen  laying  business  than 
the  chickens  themselves  knew  about  the  pre- 
ferred stock  they  were  assumed  to  be  guaran- 
teeing the  dividends  on.  Shortly  after  this 
exploitation,  the  promoters  quietly  folded  their 
tents  and  stole  away,  as  certain  kinds  of  pro- 
moters have  a  way  of  doing,  with  the  result 
that  the  innocent  but  superficial  investors  are 
still  waiting  for  their  dividends,  and  are  hold- 
ing their  stocks  as  "permanent  investments.'* 

Another  instance  of  the  get-rich-quick 
scheme  which  fooled  a  large  number  of  sup- 
posedly sane  investors  was  the  promotion  of 
the  "sea  water  gold"  enterprise  a  few  years 
ago.     A  certain  man  named  Jergensen,  who 


114    ART  OF  WALL  STREET  INVESTING 

was  more  avaricious  than  honest,  happened  to 
discover  an  article  in  an  encyclopaedia  which 
brought  to  his  knowledge  the  fact  that  sea 
water  contains  a  small  percentage  of  gold,  but 
that    no    method    has    ever    been    discovered 
whereby  the  separation  of  the  two  could  be 
brought  about.    He  then  devised  a  scheme  for 
pretending    that   he   had   himself   invented    a 
secret  process  for  doing  this  very  thing,  and 
thereby  induced  investors  to  pass  their  ready 
cash  his  way.    He  built  a  small  plant  on  the 
water's  edge  at  South  Lubec,  Maine,  a  portion 
of  the  plant  being  constructed  out  of  sight,  and 
under  water.    He  then  secured  a  small  quantity 
of  gold  bullion  (a  small  genuine  gold  brick) 
and  exhibited  it  to  certain  people  in  the  city 
of  Boston,  at  the  same  time  making  the  state- 
ment that  it  was  the  result  of  a  test  of  his 
secret    process    for    washing    gold    from    sea 
water.    His  incredulous  listeners  were  invited 
to  go  to  the  government  assay  office  with  him 
to  test  the  genuineness  of  the  little  brick.    This 
they  did  and  to  their  surprise  found  that  it  was 
all  pure  gold.    Then,  as  a  further  proof  of  his 
discovery,   Jergensen   invited   them   to   go   to 
South  Lubec  with  him  and  see  his  plant.    They 
did  so  and  saw  the  mysterious  looking  machin- 
ery, part  of  which  was  under  water.     They 


"GET-RICH-QUICK"  SCHEMES  115 

were  duly  impressed.  He  then  explained  that 
he  could  not  let  them  see  how  he  did  it,  as  he 
must  naturally  guard  his  secret.  But  the  next 
morning  he  appeared  with  a  small  can  full  of 
new  gold  dust,  which  he  said  he  had  secretly 
washed  out  during  the  night.  After  that,  for 
a  whole  week,  while  his  visitors  remained,  he 
appeared  every  morning  with  a  moderate  quan- 
tity of  gold  dust  which  he  exhibited  as  a  result 
of  the  previous  night's  work.  As  this  produc- 
tion steadily  continued  his  audience  grew. 
Others  came  on  from  Boston  and  the  wonder- 
ful discovery  was  on  the  lips  of  a  steadily  in- 
creasing number  of  people.  When  he  next 
went  to  Boston,  taking  the  gold  dust  with  him, 
and  converted  it  into  cash  at  the  assay  office, 
many  apparently  shrewd  people  were  thor- 
oughly convinced  and  regarded  his  claims  as 
absolutely  proven.  He  then  organized  a  com- 
pany and  began  to  sell  stock,  and  as  the  snow- 
ball had  begun  to  roll,  it  very  quickly  increased 
to  gigantic  proportions. 

Within  a  short  period^  investors  in  Boston 
and  vicinity  were  sacrificing  good  bonds  and 
stocks,  withdrawing  savings  bank  deposits,  and 
generally  falling  over  each  other  in  a  mad  rush 
to  get  in  on  the  ground  floor  in  this  sea  water 
gold  bonanza.     It  was  afterwards  estimated 


ii6    ART  OF  WALL  STREET  INVESTING 

that  before  the  fraud  was  publicly  exposed,  Jer- 
gensen  and  his  accomplices  had  secured  nearly 
a  million  dollars.  The  final  outcome  was,  that 
Jergensen  secretly  escaped  to  Europe  with 
most  of  the  money,  and  his  victims  are  whist- 
ling for  their  "great  profits"  to  this  day. 

Many  other  schemes  equally  as  fraudulent 
have  been  worked  during  recent  years  in  Wall 
Street  and  elsewhere,  and  though  constantly 
exposed  in  the  newspapers,  yet  new  ones  crop 
up  nearly  every  day,  and  the  public  continue 
to  bite.  The  advertising  columns  of  the  news- 
papers and  magazines  are  full  to  overflowing 
with  roseate  propositions  for  the  investment 
of  money;  gold  and  copper  mines;  industrial 
undertakings;  new  railroad  projects;  traction 
companies,  and  various  other  promotion 
schemes.  Millions  of  dollars  are  invested  every 
week  by  small  investors  in  this  country,  and  a 
large  proportion  of  it  is  constantly  "steered" 
into  unsafe  channels,  with  a  resultant  loss  to 
thousands  of  investors.  As  an  illustration  of 
how  persistently  and  easily  unsuspecting  peo- 
ple are  misled  and  swindled,  instance  the  fol- 
lowing: A  very  conspicuous  concern  has  been 
"operating  for  the  past  five  years  or  so  one  of 
the  largest  and  cleverest  mining  swindles  ever 
known    in    the    United    States.    Sumptuous 


"GET-RICH-QUICK"  SCHEMES  117 

offices  are  maintained  in  Broadway,  New  York, 
and  about  forty  branch  offices  have  been  estab- 
lished in  various  cities  of  the  United  States  and 
Canada.  A  number  of  honest  men  have  been 
drawn  into  the  scheme  by  baits  of  alluring 
commissions^  and  have  peddled  the  rotten 
shares  of  this  firm  of  stock-jobbers  among  their 
friends  and  neighbors,  to  the  loss  of  their  own 
peace  of  mind  and  reputations.  The  plan  of 
this  swindle  is  neat  and  com.prehensive.  The 
firm  announced  that  it  would  operate  on  the 
lav7  of  averages,  and  by  handling  many  mines 
the  good  ones  v/ould  make  up  for  the  failures. 
Considerable  bluffing  has  been  done  in  the  way 
of  crude  mining  operations,  but  none  of  the 
'mines'  have  proven  successful,  and  none  are 
likely  ever  to  be  successful. 

"This  firm  of  sharpers  began  paying  divi- 
dends on  shares,  when  no  profits  were  earned, 
for  which  they  should  be  jailed  for  the  common 
swindlers  that  they  are.  Stock  in  the  worth- 
less companies  were  exchanged  for  stock  in 
equally  worthless  companies  v/henever  share- 
holders grew  tired,  and  the  victims  of  conspir- 
acy v/ere  tolled  along  by  the  'dividends'  paid 
out  of  the  money  they  had  themselves  fur- 
nished. Recently  cash  dividends  have  been 
suspended,    and   'scrip'    dividends    substituted 


ii8    ART  OF  WALL  STREET  INVESTING 

therefor.  It  is  reported  that  this  firm  has 
bilked  something  like  16,000  small  investors,  in 
the  United  States  and  Canada,  to  the  tune  of 
several  millions  of  dollars." 

The  methods  for  promoting  all  kinds  of  swin- 
dles have  in  recent  years  been  refined  down  to 
an  exact  science.  Experience  has  proven  that 
the  most  vulnerable  class  of  people  to  be  at- 
tracted by  investing  swindles  aside  from 
women,  are  ministers,  doctors,  teachers  and 
other  professional  people.  There  are  in  New 
York  a  number  of  concerns  who  make  a  busi- 
ness of  supplying  classified  lists  of  possible 
investors  for  the  use  of  those  who  wish  to  ex- 
ploit mining  swindles  and  other  schemes. 
These  lists  are  classified  into  ten  dollar  in- 
vestors, twenty-five  to  one  hundred  dollar  in- 
vestors, one  hundred  to  five  hundred  dollar  in- 
vestors; and  investors  having  $10,000  or  more 
available.  The  "ten  dollar  investors"  are 
mostly  made  up  of  a  class  of  people  who  are 
in  the  habit  of  taking  a  small  "flyer"  occasion- 
ally of  not  over  ten  dollars,  investing  this 
amount  on  the  theory  that  it  may  turn  out  v/ith 
a  big  profit,  but  that  in  any  event  the  loss  can- 
not exceed  ten  dollars.  This  class  appeals  to 
the  swindler  also,  in  spite  of  the  fact  that  the 
amounts  invested  are  so  small,  for  the  reason 


"GET-RICH-QUICK"  SCHEMES  iig 

that  even  if  the  scheme  is  exposed  as  a  swindle, 
the  individual  amounts  are  so  small  that  it 
would  not  pay  any  single  person  to  resort  to 
law  for  the  recovery  of  his  money.  True  it  is 
that  a  large  number  of  such  investors,  if  acting 
in  concert,  would  become  a  menace,  but  as  a 
rule  such  investors  are  too  widely  scattered,  or 
too  unintelligent  or  indifferent  to  make  any 
move  of  this  kind.  In  number,  these  ten  dollar 
investor  lists  run  into  the  hundred  thousands, 
and  are  the  main  avenue  for  floating  all 
schemes  of  the  cheaper  and  more  openly  fraud- 
ulent variety. 

The  "twenty-five  to  fifty  dollar"  list  is  made 
up  of  country  investors,  Methodist  and  Baptist 
ministers,  country  doctors  and  all  classes  of 
teachers;  also  barbers,  waiters,  hospital  nurses 
and  the  general  class  of  people  who  are  able 
in  one  way  or  other  to  set  aside  for  a  rainy 
day  from  $25  to  $100  per  year.  These  Hsts  are 
used  in  slightly  more  pretentious  schemes,  of 
course,  v/ith  sometimes  a  little  more  merit  to 
them.  The  $100  to  $500  investors  consist  of 
doctors  of  slightly  higher  grade  than  those  re- 
ferred to  above ;  also  college  teachers  and  pro- 
fessors, small  Wall  Street  lambs,  Episcopal  and 
Presbyterian  ministers,  mercantile  clerks, 
some  country  merchants  and  other  thrifty  peo- 


120   ART  OF  WALL  STREET  INVESTING 

pie  who  annually  accumulate  a  few  hundred 
dollars  over  and  above  their  cost  of  living. 
Such  lists  are  used  for  more  pretentious 
schemes,  and,  in  addition  to  the  promotion  of 
frauds,  they  are  sometimes  used  in  perfectly 
sound  and  legitimate  enterprises.  The  higher 
grade  lists,  covering  $i,ooo  to  $100,000  invest- 
ors, largely  explain  themselves,  and  while  they 
are  as  often  used  by  schemers  for  offering  their 
wares,  yet  as  they  are  largely  made  up  of  m.ore 
sensible  and  cautious  people,  they  are  not  so 
popular  in  the  "get-rich-quick"  promoting  fra- 
ternity of  the  larger  lists  of  more  modest  in- 
vestors. 

While  swindles  are  promoted  to  a  gigantic 
extent  through  circulars  and  by  mail,  yet  much 
business  is  also  done  through  the  medium  of 
nev/spapers,  magazines,  and  so  forth.  Many 
(but  not  all)  of  the  large  metropolitan  dailies 
will  sell  advertising  space  in  which  notorious 
swindles  are  promoted ;  magazines  also  of  high- 
grade  in  other  ways,  constantly  sell  space  for 
the  exploitation  of  mining,  real  estate  and 
other  schemes;  the  columns  of  country  dailies 
and  weeklies  are  not  only  open  as  a  rule  to 
such  schemes,  but  for  a  consideration  they  will 
often  publish  "write-ups"  recommending  or 
booming  a  particular  enterprise.    The  "write- 


"GET-RICH-QUICK"  SCHEMES  121 

ups"  generally  consist  of  editorial  or  other 
special  articles  which  are  prepared  or  endorsed 
by  the  promoters  themselves,  and  they  of 
course  pass  in  the  reader's  mind  as  genuine  and 
truthful. 

These  are,  of  course,  frauds  of  the  most  pal- 
pable kind  and  the  publication  of  such  matter 
is  entirely  unfair  to  the  readers  of  the  paper. 
It  is  a  species  of  cheap  and  insidious  deception 
which  should,  wherever  found,  be  condemned 
in  unmeasured  terms.  Another  illegitimate 
method  of  the  promotion  of  swindles  is  through 
trade  journals,  particularly  in  the  mining  indus- 
try. This  country  is  nowadays  flooded  with 
mining  newspapers  and  journals,  which,  while 
ostensibly  independent  and  legitimate  in  their 
character  and  methods,  are,  as  a  matter  of  fact, 
actually  owned  and  controlled  by  the  same 
people  who  are  engaged  in  the  promotion  of 
mining  and  other  swindles  on  a  gigantic  scale. 
These  journals  are  filled  with  special  articles 
and  editorials  which  recomm*end  and  describe 
in  glittering  terms,  the  stocks  and  possibilities 
of  this  and  that  enterprise  in  mining,  or  oil,  or 
real  estate,  or  manufacturing,  in  which  they 
themselves  are  interested.  This  is  a  more  mod- 
ern method  of  exploiting  svvundles  than  some 
of  the  others,  and  apparently  has  been  most 
effective. 


122    ART  OF  WALL  STREET  INVESTING 

In  considering  roseate  prospectuses  and  the 
various  other  plans  which  are  constantly  found 
in  the  public  prints  offering  shares  for 
sale,  one  of  the  rules  of  nearly  universal 
application,  which  will  usually  go  a  long  way 
toward  the  protection  of  the  investor,  is  this: 
Always  question  any  proposition  offering 
stocks  or  bonds  for  sale  where  such  offers  are 
made  directly  by  the  company  itself,  and  not 
through  a  banking  house  or  other  reputable 
concern.  If  no  bankers  are  handling  the  sale 
of  securities  it  is  usually  the  case  that  there 
is  something  "shady"  about  the  scheme. 
There  are  exceptions,  of  course,  but  not  many. 
If  the  securities  are  offered  by  bankers  and 
brokers,  the  next  step  should  be  to  ascertain 
the  standing,  reputation  and  financial  strength 
of  the  bankers  or  brokers  themselves.  Wall 
Street  and  the  other  financial  centers  of  the 
country  have  their  full  share  of  irresponsible 
concerns  of  this  class. 

The  apparently  plausible  statement  is  fre- 
quently made  that  money  is  saved  to  the  com- 
pany and  its  stockholders  by  avoiding  the  em- 
ployment of  a  banker  or  agent  to  market  secur- 
ties.  But  this  is  not  c>o  in  ninety-nine  cases  out 
of  a  hundred.  If  a  proposition  has  merit,  the 
promoters  always  find  it  much  more  econom- 


"GET-RICH-QUICK"  SCHEMES  123 

ical  to  go  to  a  concern  who  have  specialized 
and  have  developed  the  proper  machinery  for 
the  floating  of  securities,  rather  than  under- 
take to  do  it  themselves.  The  banker  not  only 
has  the  clientele,  but  he  has  the  organization 
for  handling  the  business  effectively  and  eco- 
nomically; and,  of  course,  in  many  cases  his 
prestige  and  general  reputation  have  much  to 
do  with  making  the  flotation  a  success.  For  all 
this  he  frequently  charges  a  good  round  com- 
mission ;  sometimes  too  much,  perhaps,  but  not 
so  often  as  is  generally  supposed.  Indeed,  it 
would  in  most  cases  upon  investigation  prove 
to  be  a  fact  that  without  the  banking  medium, 
the  flotation  would  cost  far  more  than  the 
usual  amount  represented  by  an  apparently 
heavy  discount  or  commission.  It  is  a  part 
of  the  business  of  the  banker  to  float  securities, 
just  as  it  is  a  part  of  the  business  of  the  trust 
company  to  pay  coupons.  People  sometimes 
think  it  strange  that  a  large  corporation,  with 
an  office  in  New  York  City,  should  pay  a  com- 
mission to  a  trust  company  to  cash  the  coupons 
on  its  own  bonds  each  six  months,  when  it  ap- 
parently might  do  this  work  itself.  But  the 
answer  to  that  is  that  the  trust  company  main- 
tains the  machinery  and  organization  for  pay- 
ing the  coupons  of  not  merely  one  but  of  per- 


124   ART  OF  WALL  STREET  INVESTING 

haps  one  hundred  companies,  and  therefore 
can  afford  to  do  such  work  at  a  minimum  cost 
and  for  far  less  than  the  corporation  itself  could 
possibly  do  it. 

It  will  be  seen,  after  reading  the  foregoing 
chapter,  that  the  simplest  and  quickest  way  of 
avoiding  the  "get-rich-quick"  scheme,  no  mat- 
ter where  or  how  presented  or  however  roseate 
and  plausible  its  promises  and  claims  may  be, 
is  to  never  entertain  any  proposition  which  is 
not  offered  through  a  banker  or  other  agent, 
and  then,  having  adopted  this  rule,  to  go  one 
step  further:  never  have  dealings  with  a 
banker,  broker  or  financial  agent  until  you  have 
investigated  and  are  satisfied  as  to  his  char- 
acter, standing  and  general  reputation. 


VIII 

Reorganizations  and  Syndicates 

THE  subject  of  reorganizations  is,  of  course, 
too  wide  a  one  to  treat  adequately  in  a 
book  of  limited  size  and  scope  such  as  this,  and 
it  is  only  practicable  to  touch  upon  it  briefly. 
Reorganizations  in  both  railroad  and  industrial 
finance  are  brought  about  as  a  result  of  various 
causes;  one  of  the  chief  being  over-capitaliza- 
tion. In  the  period  extending  from  1893  to 
1897,  a  large  number  of  the  most  important 
railroad  systems  of  the  country  were  reorgan- 
ized, and  their  capitalizations  scaled  down 
very  extensively, — in  some  cases  more  than 
fifty  per  cent.  In  the  same  period  many  of  the 
larger  industrial  combinations  were  also  reor- 
ganized, the  chief  among  these  being  the  well- 
known  Cordage  Trust. 

It  sometimes  happens  that  a  concern  is  re- 
organized for  other  reasons  than  insolvency. 
Thus,  the  Standard  Oil  Trust  was  re- 
organized, being  changed  from  a  trusteed  ag- 

125 


126    ART  OF  WALL  STREET  INVESTING 

gregation  of  separate  companies  to  one  large 
corporation  of  $97,500,000  capital.  This  change 
was  made  to  conform  to  newly  enacted  laws, 
and  as  a  partial  concession  to  public  senti- 
ment. A  concrete  example  of  the  methods 
and  purpose  as  well  as  the  anticipated  results 
of  a  reorganization  can  best  be  shown  in  the 
manner  followed  below.  In  this  way  we  will 
avoid  the  complexity  which  always  results  in 
analyzing  an  actual  reorganization  with  its 
many  details,  whereas  by  creating  a  simple 
example  as  is  done  below,  we  demonstrate  the 
principle  without  beclouding  the  mind  of  the 
student  with  incidental  facts  and  figures. 
®.  Let  us  assume  the  existence  of  a  railroad 
system  of  1,500  miles,  known  as  the  Great 
Southern  Railroad  Company.  It  is  capitalized 
as  follows: 

First  Mortgage  6%  bonds,  due  1920 $3,000,000 

Second  Mortgage,  5%  bonds,  due  1935 3,000,000 

Consolidated    Mortgage    5%    bonds,    due 

1950 2,000,000 

Preferred  Stock  (6%  cumulative) 3,000,000 

Common    Stock 3,000,000 

Total  capitalization  (par  value) $14,000,000 

It  will  be  noted  that  to  pay  the  interest  on 
the  three  bond  issues  requires  $430,000  per 
year,  and  if  6%  is  also  paid  on  preferred  stock, 


REORGANIZATIONS  AND  SYNDICATES  127 

$180,000  additional  will  be  required,  making 
$610,000  in  all.  To  pay  any  dividend  on  the 
common  stock  would,  of  course,  require  a  still 
further  amount. 

Now  let  us  assume  also  that  the  first  mort- 
gage carries  a  sinking  fund  of  $60,000  per  year, 
which  must  be  covered,  of  course,  out  of  earn- 
ings. This  will  increase  the  total  charges  to 
$490,000  per  annum,  excluding  the  dividend 
charge. 

Over  a  period  of  six  years  the  gross  and  net 
earnings  of  this  road  have  resulted  as  follows : 

Grops  Operating  Net  Fixed      ^._ 

„       .  _  ^       .         «,_  Dili  .rcnc9 

Earnings  Expenses        Earnings  Charges 

1900. $2,000,000  $1,300,000  (65%)  $700,000  $490,000  $210,000-|- 

1901.  2,100,000  1,365,000  (65%)  735,000  490,000     245,0C0-|- 

1902.  1,600,000  1,120,000(65%)  480,000  490,000       10,000-- 

1903.  1,800,000  1,080,000  (60%)  720,000  490,000     230,000  + 

1904.  1,050,000  735,000  (70%)  315,000  490,000     175,000— 

1905.  1,400,000  1,050,000  (75%)  350,000  490,000     140,000— 
(In  the  last  column  thp  plus  (-|-)   sign  indicates  surplus, 

and  the  minus   ( — )  sign  deficit.) 

In  examining  the  foregoing  statement  we 
note  that  in  igoo  and  1901  the  road  earned  a 
comfortable  surplus  over  charges,  and  we  can 
assume  that  a  part  of  this  surplus  was  paid 
out  in  preferred  stock  dividends.  The  road 
was  pretty  heavily  bonded  but  it  was  operated 
on  the  theory  that  growing  business  would 
take  care  of  these  heavy  requirements.     But 


I2S    ART  OF  WALL  STREET  INVESTING 

in  the  third  year,  a  very  serious  falling  off  in 
earnings  occurred,  owing  to  a  crop  failure,  and 
the  net  earnings  v^ere  not  quite  equal  to  the 
charges.  In  the  fourth  year,  however,  a  sub- 
stantial recovery  is  made  and  a  good  surplus 
again  shown.  But  in  the  fifth  and  sixth 
years  further  serious  reverses  occur  and  vast 
deficits  are  shown.  In  the  endeavor  to  keep 
down  expenses  during  these  latter  years,  the 
roadbed  has  not  been  properly  taken  care  of, 
equipment  has  run  down  at  the  heel,  and  the 
property  has  been  "skinned"  generally  in 
order  to  show  net  results.  It  will  be  noted 
that  in  the  earlier  years  the  percentage  of  ex- 
penses to  gross,  even  when  the  latter  totals 
were  larger,  was  65%,  a  normal  figure.  But 
later,  when  the  gross  began  to  drop,  the  ex- 
penses were  cut  down  in  even  greater  propor- 
tion (except  in  1904,  when  the  gross  fall  was 
extraordinarily  heavy)  and  practically  no 
money  was  spent  on  the  property  to  keep  it 
up  to  the  proper  standard  for  doing  business. 
The  net  result  is  that  when  1905  arrives,  the 
company  is  in  a  disastrous  condition ;  and  has 
not  even  available  funds  to  meet  its  charges, 
not  to  mention  money  needed  for  absolutely 
necessary  expenditures  to  maintain  the  prop- 
erty.   Besides,  its  credit  is  gone,  its  securities 


REORGANIZATIONS  AND  SYNDICATES  125 

are  selling  at  great  discounts,  and  it  is  in  no 
position  to  raise  new  capital.  Its  only  course 
is  to  apply  to  the  courts  for  a  receiver,  which 
it  does.  The  receiver  then  takes  charge  and 
operates  the  property,  pending  its  reorganiza- 
tion. 

After  certain  examinations  and  delays,  com- 
mittees representing  bondholders  and  stock- 
holders get  together,  and  in  time  a  plan  of 
reorganization  is  formulated  and  united  upon. 
In  this  particular  case  the  plan  might  reason- 
ably be  worked  out  along  the  following  lines: 

A  new  company  is  formed  with  an  author- 
ized capital  as  follows: 

Common   stock $  5,000,000 

Preferred  stock  (4%  non-cumulative) ....  2,000,000 
First  Consol.  4%  bonds 10,000,000 

Total $1 7,000,000 

The  old  second  mortgage  bondholders  are 
then  offered  an  equal  amount  ($3,000,000)  of 
the  new  consol.  4%  bonds  in  exchange  for 
their  holdings;  the  old  consolidated  holders 
are  offered  50%  ($1,000,000)  in  new  consol. 
4%  bonds  and  50%  ($1,000,000)  in  new  4% 
preferred  stock ;  the  old  preferred  stockholders 
are  offered  20%  ($600,000)  in  new  4%  pre- 
ferred stock  and  80%  ($2,400,000)  in  new  com- 
mon stock;  the  old  common  stockholders  are 


130   ART  OF  WALL  STREET  INVESTING 

required  to  pay  an  assessment  of  io%  ($300,- 
000)  after  which  they  receive  $10  per  share  in 
new  preferred  stock  and  $30  per  share  ($1,- 
800,000)  in  new  common  stock.  If  this  plan  is 
carried  through  to  a  success  the  net  results 
after  completion  will  be  as  follows : 
There  will  be  outstanding — 

Old    First    Mortgage    6%    bonds    (undis- 
turbed)    $3,000,000 

New  Consol.  Mortgage  4%  bonds 4,000,000 

New  Preferred  stock 1,900,000 

New   Common   stock 4,200,000 


Total $13,100,000 

There  will  be  left  unissued  $6,000,000  of  the 
new  4%  consols,  of  which  $3,000,000  will  be 
reserved  to  retire  the  old  first  mortgage  6s 
when  the  latter  mature,  and  the  balance  will 
be  reserved  for  capital  requirements.  With  the 
preferred  and  common  stock  not  disposed  of 
in  the  above  statement  ($ioo,c300  in  preferred 
and  $800,000  in  common),  the  reorganization 
committee  and  underwriting  syndicates  will 
be  compensated  for  their  work  and  reimbursed 
for  their  expenses.  The  total  capitalization 
outstanding  therefor,  when  the  reorganiza- 
tion is  completed,  will  be  $14,000,000,  exactly 
the  same  as  was  the  case  with  the  old  com- 
pany. 


REORGANIZATIONS  AND  SYNDICATES  131 

Note,  however,  the  changes  that  have  been 
brought  about.  The  reorganized  company  has 
received  $300,000  in  new  cash  and  also  has 
$3,000,000  of  available  4%  bonds  in  its  treas- 
ury (a  portion  of  which  may  be  underwritten 
in  the  plan  and  sold  immediately  for  use  in 
improving  the  property),  and  its  fixed  charges, 
including  the  old  sinking  fund,  will  have  been 
reduced  from  $490,000  to  $400,000  per  annum. 
As  the  average  annual  net  earnings  of  the 
property  for  the  six  year  period  were  $550,000, 
the  road  is  now  in  a  financial  position  where  it 
can  immediately  show  a  substantial  surplus 
above  its  charges.  Under  the  new  regime,  with 
gross  earnings  at  $1,700,000  (the  average  for 
six  years)  and  assuming  average  operating  ex- 
penses of  66  2-3%,  we  would  have  a  surplus 
above  charges  of  $166,666,  which  would  equal, 
besides  the  4%  dividends  on  the  preferred 
stock,  nearly  2%  on  the  common  stock.  In  the 
event  of  some  of  the  treasury  bonds  being  is- 
sued for  improvements  or  acquisitions  it  would, 
of  course,  probably  result  that  an  equivalent 
increase  in  income  would  be  shown. 

It  is  in  the  carrying  through  of  a  plan  such 
as  the  foregoing,  that  the  work  of  the  under- 
writing syndicate  comes  in.  The  syndicate 
consists  of  a  group  of  financiers,  bankers  or 


132    ART  OF  WALL  STREET  INVESTING 

Others  of  financial  standing  and  resourceful- 
ness, who  band  together  and  formally  agree  to 
guarantee  the  success  of  the  plan.  Usually  a 
banking  house  or  trust  company  of  prominence 
becomes  the  syndicate  manager.  An  agree- 
ment is  then  entered  into  by  the  syndicate 
to  take  all  the  bonds  and  stocks  at  a  given 
price  which  are  not  taken  by  the  original  hold- 
ers themselves  on  the  terms  of  the  plan.  In 
this  way  the  success  of  the  plan  is  insured,  and 
the  old  holders  who  refuse  to  join  in  the  reor- 
ganization are  either  given  their  money  or 
bought  out  on  a  mutually  satisfactory  basis. 

The  underwriting  syndicate  seeks  its  profit 
in  two  ways.  First,  through  a  commission 
from  the  new  company,  which  usually  comes 
in  the  shape  of  securities.  In  the  foregoing 
case  the  syndicate  would  get  $100,000  in  pre- 
ferred stock  and  $800,000  in  common  stock. 
Second,  the  syndicate  expects,  as  an  addi- 
tional source  of  income,  to  sell  at  a  profit 
through  its  syndicate  managers,  whatever 
securities  it  is  obliged  to  take  up  in  the  under- 
writing. If  these  securities  are  not  market- 
able, they  are  then  either  "tied  up"  and  car- 
ried for  a  certain  specified  period,  with  a  view 
of  ultimate  sale,  or  else  they  are  delivered  di- 
rectly to  the  members  of  the  syndicate,  who  do 
what  they  see  fit  with  them. 


REORGANIZATIONS  AND  SYNDICATES  13^ 

Within  the  past  ten  years,  and  particularly 
since  the  great  expansion  of  corporate  enter- 
prise in  both  the  railroad  and  industrial  fields, 
the  so-called  syndicate  underwriting  business 
has  grown  to  a  position  of  great  importance  in 
Wall  Street.  There  are  certain  concerns  of 
large  capital  and  resources  who  do  practically 
nothing  else.  It  goes  without  saying  there- 
for, that  the  underwriting  syndicate  is  a 
necessary  part  of  the  Wall  Street  machinery 
both  in  connection  with  reorganizations  and 
new  corporate  enterprises  and  consolidations 
of  all  kinds. 


IX 

The  New  York  Stock  Exchange 

NEW  YORK  has  no  more  entertaining 
public  exhibition  than  its  Stock  Ex- 
change. It  is  one  of  the  show  places  of  the 
city.  The  visitor  who  for  the  first  time  looks 
down  from  a  gallery  upon  its  members  in  the 
act  of  transacting  business,  is  astonished  at  the 
apparent  confusion  he  witnesses.  He  seems 
to  have  entered  a  madhouse.  The  idea  that  the 
market  values  of  our  leading  securities  should 
be  determined  by  what  appears  to  him  to  be 
a  howling  mob  of  incurable  lunatics,  is  incom- 
prehensible But  if  nothing  could  be  said 
against  the  Exchange,  which  is  simply  a  big 
bazaar  for  the  sale  of  bonds  and  stocks,  except 
its  tumultuousness  and  the  seeming  lack  of 
dignity  among  its  operators,  criticism  would 
have  in  it  but  an  indifferent  target  for  its  shafts. 
Much  graver  questions  grow  out  of  its  exist- 
ence. Is  it  a  harmless  institution?  Is  it  a 
public  blessing?    Is  it  a  public  curse? 

135 


136    ART  OF  WALL  STREET  INVESTING 

As  a  great  central  mart  for  current  securi- 
ties, it  is  certainly  of  vast  use.  There  is  no 
reason  why  bonds  and  shares  should  not  be 
publicly  dealt  in,  and  in  large  quantities,  as 
well  as  dry  goods;  as  well  as  corn  and  cotton 
and  beef  and  kitchen  vegetables.  If  the  Stock 
Exchange  transactions  were  restricted  to  the 
bona-fide  buying  and  selling  of  bonds  and 
shares^  not  a  word  could  be  justly  said  against 
it.  But  is  it  so  restricted?  Unfortunately,  no. 
A  main  occupation  is  wagering  on  stocks; 
many  traders  while  going  through  the  form  of 
buying  and  selling,  simply  bet  their  money 
upon  the  rise  or  fall  of  the  shares  they  select, 
as  they  would  upon  the  shiftings  of  cards  or 
dice.  The  Exchange,  while  doing  a  large  legiti- 
mate business,  is  also  an  immense  speculating 
establishment. 

Its  members  are  divided  into  two  classes — 
those  who  execute  commissions  for  others  and 
those  who  deal  on  their  own  account.  It  is 
needless  to  say  that  among  the  latter  are  the 
boldest  and  sharpest  speculators  of  the  day. 
The  careers  of  these  men  can  be  sketched  in 
very  few  words.  Through  the  exercise  of  supe- 
rior native  wits  or  the  accident  of  extraordi- 
nary luck,  they  flourish  marvelously  for  a  time ; 
but  only,  as  a  rule,  to  lose  their  heads  and  their 


THE  NEW  YORK  STOCK  EXCHANGE  137 

balance  at  the  last  and  go  down,  often  through 
a  single  disastrous  transaction — faster  than 
they  went  up.  There  are  exceptions.  Some 
flourish  to  the  end,  dying  generally  young — or 
retiring  with  estates  unbroken.  But  they  are 
exceptions.  Wall  Street  is  a  place  where  few 
fortunes  are  made  and  a  great  many  are  lost. 
The  stories  of  its  magnificent  triumphs,  and  of 
its  equally  magnificent  wrecks,  read  like  tales 
from  "The  Arabian  Nights";  some  of  them 
like  passages  from  "Dante's  Inferno."  Wall 
Street  has  had  its  suicides  by  the  dozen,  and 
will  have  plenty  more.  It  would  not  be  Wall 
Street  without  surprises.  And  yet  there  is  a 
singular  sameness  in  the  ordinary  trader's  ex- 
perience. He  runs  an  exciting,  if  at  times  a 
rough  and  stormy,  career,  snatches  or  seems 
to  snatch  a  good  many  pleasures  by  the  way, 
makes  and  breaks  with  about  equal  abandon, 
wrecks  his  health  in  a  hurry,  dies  early  and 
suddenly,  and  then — ^well,  then,  when  his  af- 
fairs come  to  be  settled,  there  are  often  found 
large  blocks  of  utterly  worthless  shares,  per- 
haps a  fast  horse  or  two,  possibly  a  yacht  or 
automobile,  some  costly  souvenirs,  a  few  solid 
assets,  possibly  heavy  debts,  or  even  actual 
bankruptcy.  Poor  fellow,  everybody  has  for- 
gotten all  about  him. 


138    ART  OF  WALL  STREET  INVESTING 

Of  the  ordinary  Wall  Street  speculator,  how- 
ever clever  or  however  favored  for  a  time,  it 
is  perfectly  safe  to  say  that,  if  he  lives  long 
enough  and  sticks  to  the  business,  he  will  fin- 
ally come  to  grief. 

But  how  about  Vanderbilt  pere,  who  was 
more  or  less  of  a  Wall  Street  operator  all  his 
many  days,  and  a  few  others  not  wholly  dis- 
similar if  less  conspicuous  examples? 

Ah!  that  brings  us  to  a  view  of  some  of  the 
interior  workings  of  the  New  York  Stock  Ex- 
change that  the  public  has  little  conception  of, 
and  which  alone  will  give  a  correct  under- 
standing of  its  real  character.  The  popular 
idea  is  that  the  Exchange  has  upon  its  list,  to 
be  dealt  in,  all,  or  nearly  all,  prominent  stocks 
and  bonds  of  acknowledged  value,  impartially 
selected  and  solely  because  of  their  merits. 
There  could  be  no  greater  misconception.  We 
do  now  always  find  there  the  shares  of  hun- 
dreds of  high  grade  securities,  both  stocks  and 
bonds,  representing  corporations  of  high  stand- 
ing, and  large  business  success;  railroads, 
industrials,  municipal  corporations  whose  man- 
agement is  unexceptional,  and  whose  securities 
are  among  the  choicest  investments.  But  if 
there  is  a  company  with  a  speculative  board 
of  directors,  and  whose  stock  has  been  watered 


THE  NEW  YORK  STOCK  EXCHANGE  139 

until  it  will  float  a  respectable  navy,  an  at- 
tempt is  often  made  to  place  its  shares  on  the 
Exchange's  list.  Or  if  there  is  a  company  that 
is  absolutely  controlled  and  directed  by  some 
particularly  active  and  conspicuous  manipula- 
tor, its  stock  may  often  be  found  at  the  same 
place.  There  never  is,  apparently,  much  diffi- 
culty in  a  big  stock  operator  getting  his  issues 
upon  the  list.  What  has  been  the  result? 
Simply  that  much  genuine  rubbish  has  been 
unloaded  upon  the  public. 

Much,  but  not  too  much,  has  been  said  in 
condemnation  of  stock  watering ;  of  the  produc- 
tion of  corporate  securities  representing  little 
or  no  cash  investment,  and  which  innocent  per- 
sons are  led  to  purchase  in  the  belief  that  they 
are  getting  full  values.  But  how  is  it  that 
these  speculative  issues  are  so  easily  marketed, 
and  the  producers  escape  all  responsibility  for 
the  impositions  practised?  Here  is  where  the 
Exchange's  "credit,"  so  to  speak,  is  often  used. 
The  Exchange  is  made  the  conduit  through 
which  the  water  is  diverted  to  the  investor's 
pockets.  When  it  takes  the  stock  upon  its  list, 
the  Exchange  becomes  practically  the  seller, 
supplying  the  machinery  and  means  of  trans- 
fer, and  it  guarantees  nothing.  Whoever  buys 
at  its  board  is  understood  to  take  all  risks,  no 


140    ART  OF  WALL  STREET  INVESTING 

matter  how  much  deception  is  used.  He  may 
be  victimized,  but  he  has  no  redress.  The  Ex- 
change is  simply  the  medium  through  which 
the  over-issues  have  been  marketed.  It  is  true, 
of  course,  that  without  the  facilities  of  the  Ex- 
change, many  of  the  stock  watering  frauds 
which  have  become  historical  never  could  have 
been  successfully  consummated. 

Once  on  the  Exchange's  list,  seldom  is  a 
stock  so  worthless  that,  with  a  shrewd  manipu- 
lator behind  it,  it  cannot  be  at  some  time  un- 
loaded. The  process  has  been  a  simple  one. 
First  they  are  "washed" — singular  how  the 
idea  of  water  runs  through  all  stock  operations 
— ^by  pre-arranged  sales  of  the  stock.  Outsiders 
are  then  told  that  there  is  money  in  it,  and 
they  begin  to  buy.  The  stock  is  duly  "sup- 
ported," an  indispensable  precaution — that  is, 
it  is  taken  at  quotation  prices  when  offered  by 
outside  owners,  and  so  up  and  up  it  is  marked, 
the  speculative  public  taking  large  blocks  in 
the  belief  that  it  is  going  higher,  and  with 
little  thought  of  its  actual  value,  until  there 
comes  a  time  when  the  original  supply  has 
been  exhausted,  and  the  shares  are  no  longer 
supported,  and  down,  down  they  go.  The  real 
value  of  the  stock  has  little  to  do  with  its  nego- 
tiations.   In  the  light  of  this  explanation,  there 


THE  NEW  YORK  STOCK  EXCHANGE  141 

is  no  difficulty  in  comprehending  how  certain 
great    financial    magnates,    who    are    leading 
operators  in  Wall  Street,  have  amassed  such 
colossal     fortunes.     They    have     been     stock 
manufacturers  as  well  as  stock  dealers.     The 
New  York  Exchange  has  been  their  field  of 
operations,    their    market-place.    Through    it 
they  have  sold  their  wares.     Had  they,  like 
ordinary  speculators,   confined   themselves   to 
other  people's  goods,  it  is  questionable  whether 
they   would   have    grown    exceptionally   rich. 
They  might  have  become  poor,  as  most  of  their 
associates  have  done.     But  when,  with  con- 
sciences  conformable   to   their   opportunities, 
they  had  the  means  of  selling  water  at  high 
figures  and  in  practically  unlimited  quantities, 
it  is  no  wonder  that  their  fortunes  swelled  to 
fabulous  proportions.     There  are  many  legit- 
imate, lawful  and  legally  controlled  exchanges 
whereon  speculation  to  any  large  extent  is  con- 
ducted,  but   only   the   leading   ones    need   be 
named.    The  New  York  Stock  Exchange  is  a 
lawfully  constituted  association  with  absolute 
power  to  make  and  enforce  its  own  rules  and 
regulations  upon  its  members.    An  application 
for  membership  in  it  is  scrutinized  with  the 
greatest  care,  and  the  applicant  must  prove 
himself  to  be  a  straightforward,  honest  man 


142    ART  OF  WALL  STREET  INVESTING 

before  he  is  accepted.  Transactions  between 
members  are  in  most  instances  verbal,  and  as 
they  amount  to  millions  of  dollars  in  value 
daily,  confidence  in  each  other  is  imperative. 
It  is  a  rare  occurrence  that  a  dispute  arises,  be- 
cause of  the  accuracy  and  care  exercised  in 
transactions  with  each  other,  and,  as  a  rule, 
the  same  honesty  and  methods  are  extended 
to  their  relations  with  customers  who  are  not 
members.  The  legitimate  broker  is  always 
solicitous  for  the  welfare  of  his  client,  from 
selfish  motives,  if  nothing  else.  A  customer 
who  imagines  he  has  not  been  fairly  and  hon- 
estly dealt  with  has  only  to  make  complaint 
to  the  secretary  of  the  Exchange,  stating  his 
grievance  and  an  investigation  is  had,  followed 
by  redress  and  the  severe  discipline  of  the  of- 
fending member,  should  wrong-doing  be  dis- 
covered. So  high  is  the  character  of  the  Ex- 
change members  that  no  hesitation  is  felt  by 
the  public  in  entrusting  to  their  custody  large 
sums  of  money.  What  is  true  of  the  New 
York  Stock  Exchange  is  also  true  of  the  Chi- 
cago Board  of  Trade,  upon  which  is  handled 
the  vast  products  of  the  great  agricultural 
West.  The  public  should  be  warned  against 
speculative  transactions  with  any  but  mem- 
bers of  regular  exchang-es  or  brokers  having 


THE  NEW  YORK  STOCK  EXCHANGE  143 

permanent  connections  with  them.  The  nov- 
ice is  oftentimes  unable  to  discriminate  be- 
tween the  legitimate  and  fraudulent,  but  there 
is  an  infallible  test,  as  follows:  The  rules  of 
the  New  York  Stock  Exchange  and  Chicago 
Board  of  Trade  provide  that  customers  shall 
receive  a  memorandum  of  each  transaction 
made,  which  shall  show  the  date  upon  which  it 
was  made,  the  price  and  with  whom,  so  that  if 
a  client  has  any  doubt  about  it,  he  can  inquire 
of  the  party  named  on  the  memorandum 
whether  it  is  true  or  not,  or  he  can  ask  the 
Secretary  of  the  Exchange  to  investigate  for 
him.  If  the  Secretary  cannot  confirm  the  state- 
ments in  the  memorandum,  it  often  turns  out 
that  the  parties  who  are  alleged  to  have  partici- 
pated in  the  transaction  are  frauds,  masquer- 
ading as  Stock  Exchange  members,  with 
whom  it  is  worse  than  folly  to  entrust  busi- 
ness. Hundreds  of  them  exist  in  New  York 
City  alone,  who  live  as  barnacles  on  the  ex- 
changes, bringing  ill-fame  and  discredit  to  an 
important  business. 

It  is  a  common  thing  for  a  few  large  specu- 
lators to  combine  and  form  a  "pool"  to  ad- 
vance some  specific  stock  or  group  of  stocks^ 
the  idea  being  that  "in  union  there  is 
strength."    In  such  combinations  some  one  of 


144    ART  OF  WALL  STREET  INVESTING 

the    members    is    usually    designated    as    the 
"manager,"  who  gives  all  orders  for  purchase 
and  sale.    The  business  is  generally  given  to  a 
number  of  commission  houses  who  transact  a 
miscellaneous  business,  in  order  to  keep  the 
transaction  under  cover  as  much  as  possible, 
because  publicity  would  probably  defeat  the 
plan.    The  stocks  subject  to  the  manipulation 
are  made  to  look  weak  and  strong  alternately 
— ^weak   in   order   to   induce   "short"    selling, 
when  the  "pool"  is  a  free  buyer,  and  strong  to 
induce  "outside"  buying  when  the  "pool"  is  a 
seller.     That  part  of  see-saw  manipulation  is 
continued,  making  the  stocks  active  and  at- 
tractive to  the  public,   until   many  thousand 
shares  have  been  accumulated.     In  the  mean- 
time the  most  favorable  rumors  and  reports 
relating  to  the  value  of  said  stocks  are  care- 
fully put  forth  through  market  letters,  news- 
papers, and  other  well-known  mediums.    This 
is  done  for  the  purpose  of  inducing  the  public 
to  buy,  on  the  perfectly  correct  theory  that 
the  public  does  buy  when  it  is  asked  to,  pro- 
viding the  price  is  high  and  advancing,  and 
especially  if  it  is  informed  that  "strong  parties 
are  behind  the  deal";  when  the  public  "comes 
in"  good  and  strong,  influenced  by  predictions 
of  a  further  great  advance,  it  gets  the  stock. 


THE  NEW  YORK  STOCK  EXCHANGE  145 

The  "strong"  parties  have  "unloaded,"  the 
public  is  "holding  the  bag/*  and  wonder  what 
is  the  matter. 

Recently  a  new  form  of  advertising  for 
"lambs"  has  become  popular,  which  requires 
no  capital  beyond  the  sum  needed  for  news- 
paper bills.  The  advertisement  usually  states 
that  for  a  small  sum,  paid  "weekly"  or 
"monthly,"  the  subscriber  will  receive  "sure 
tips"  on  the  market's  movements,  and  that  in 
consideration  of  one-quarter  or  one-half  of  the 
profits  secured,  the  self-styled  "Advisory 
Brokers"  will  handle  the  "deals"  for  the 
"lambs"  who  don't  know  how  to  do  it  for 
themselves.  These  "brokers"  have  a  "sure 
thing,"  as  they  always  advise  one  person  to 
operate  for  the  decline  and  another  for  an  ad- 
vance. They  are  certain  to  make  money  in  one 
of  the  transactions.  It  is  marvellous  what  a 
number  of  otherwise  cautious,  careful  people 
are  victimized  yearly  in  these  shady  opera- 
tions. 

But  the  Exchange  is  nevertheless  very  use- 
ful and  necessary  in  supplying  quotable  values 
and  furnishing  a  ready  market  for  all  classes 
of  securities.  This  important  function  of  the 
Exchange  is  well  brought  out  in  a  paragraph 
taken  from  Chas.  A.   Conant's  recently  pub- 


146   ART  OF  WALL  STREET  INVESTING 

lished  book,  "Wall  Street  and  the  Country." 
Says  Mr.  Conant: 

"One  of  the  most  persistent  of  the  halluci- 
nations which  prevail  among  people  other- 
wise apparently  lucid  and  well  informed,  is 
the  conception  that  operations  on  stock  and 
produce  exchanges  are  pure  gambling.  A 
moment's  reflection,  it  would  seem,  might  con- 
vince such  persons  that  a  function  which  occu- 
pies so  important  a  place  in  the  mechanism  of 
modern  business  must  be  a  useful  and  neces- 
sary part  of  that  mechanism;  but  reflection 
seems  to  have  little  part  in  the  intellectual 
equipment  of  the  assailants  of  organized  mar- 
kets. Only  recently  I  picked  up  a  book  pur- 
porting to  treat  of  the  subject  of  ethics,  and 
found  this  remarkable  passage:  *If,  instead  of 
betting  on  something  so  small  as  falling  dice, 
one  bets  on  the  rise  and  fall  of  stocks  or  on  the 
price  which  wheat  will  reach  some  months 
hence,  and  if  by  such  betting  one  corners  the 
community  in  an  article  essential  to  its  wel- 
fare, throwing  a  continent  into  confusion,  the 
law  will  pay  not  the  slightest  attention.  A 
gambling  house  for  these  larger  purposes  may 
be  built  conspicuously  in  any  city,  the  sign 
"Stock  Exchange"  be  set  over  its  door,  influ- 
ential men  appointed  its  officers,  and  the  law 


THE  NEW  YORK  STOCK  EXCHANGE  147 

will  protect  it  and  them  as  it  does  the 
churches.  How  infamous  to  forbid  gambling 
on  a  small  scale  and  almost  to  encourage  it  on 
a  large !' 

"The  writer  who  undertook  to  discuss  the 
Stock  Exchange  in  that  manner  in  a  book  on 
ethics,  might  well  have  devoted  himself  less 
earnestly  to  the  smaller  refinements  of  ethical 
definition  and  reverted  to  the  ancient  maxim, 
*Thou  shalt  not  bear  false  witness  against  thy 
neighbor.*  What  he  says  is  a  hodgepodge  of 
misconceptions.  If  it  be  true  that  betting  on 
the  rise  and  fall  of  stocks  be  gambling,  as  it 
undoubtedly  is,  then  what  follows  has  no  rela- 
tion to  the  first  suggestion.  To  one  having 
any  knowledge  of  the  subject-matter  the  two 
parts  of  the  first  sentence  are  inconsistent  with 
each  other  and  mutually  destructive.  Pure 
betting  is  done  in  bucket-shops,  is  of  no  use  to 
the  community,  is  destructive  to  the  morals 
and  pockets  of  young  men,  and  cannot  be  too 
severely  censured.  But  such  betting  is  not 
confined  to  buildings  bearing  the  sign  'Stock 
Exchange.*  It  has  nothing  to  do  with  the 
legitimate  processes  of  the  exchanges.  More- 
over, one  cannot  corner  the  community  on  any 
'article  essential  to  its  welfare*  by  betting  in 
bucket-shops.     He  may  perhaps  do  it  within 


148    ART  OF  WALL  STREET  INVESTING 

certain  limits  by  actual  transactions  on  the 
produce  exchanges,  because  they  involve  the 
right  to  demand  delivery.  If  it  were  true, 
however,  that  no  such  deliveries  were  con- 
templated or  could  be  made,  as  is  usually  the 
case  in  bucket-shop  gambling,  it  would  no 
more  be  possible  to  corner  the  supply  of  wheat 
by  betting  on  its  future  price  than  it  is  possi- 
ble for  a  politician  to  carry  the  election  his 
way  by  laying  heavy  odds  on  his  candidate. 
His  bets  would  not  make  votes,  and  merely 
betting  on  the  prices  of  the  commodity  would 
not  influence  the  supply. 

"The  fact  that  such  confusion  of  ideas  pre- 
vails, and  that  the  Stock  and  Produce  ex- 
changes continue  to  be  looked  upon  by  many 
good  people  as  a  sort  of  adjunct  of  Monte 
Carlo,  justifies  an  occasional  restatement  of 
in  the  mechanism  of  business.  To  take  the 
subject  up  from  an  elementary  standpoint,  it  is 
well  to  say  a  word  regarding  the  function  of 
stock  companies.  The  discovery  was  made 
long  before  our  time  that  a  piece  of  property 
or  a  new  enterprise  could  be  given  mobility 
and  divisibility  by  putting  the  title  to  its  own- 
ership into  transferable  shares.  The  creation 
of  share  companies  enables  the  small  capital  of 
the  essential  part  which  these  exchanges  play 


THE  NEW  YORK  STOCK  EXCHANGE  149 

individuals  to  be  gathered  into  large  funds 
necessary  to  build  factories  and  railways.  It 
divides  the  risk  of  an  undertaking  among 
many  persons,  and  places  the  enterprise  be- 
yond the  accidents  of  a  single  human  exist- 
ence by  giving  it  a  fictitious  body  dowered  by 
law  with  perpetual  life." 

But  in  addition  to  being  a  balance-wheel  to 
the  business  of  the  country,  Stock  Exchange 
speculation  is  often  a  disturbing  factor.  It 
does  not  even  furnish  trustworthy  news.  No- 
where is  it  so  difficult  to  get  reliable  intelli- 
gence concerning  any  stock  dealt  in  there,  as 
in  Wall  Street.  The  inventiveness  of  the  spec- 
ulative broker  is  something  marvelous.  He 
can  ruin  the  country  one  hour  and  save  it  the 
next.  He  can  blight  the  crops  of  a  whole  sec- 
tion, or  he  can  fill  the  land  with  abundance. 
He  can  make  war  or  he  can  make  peace,  ex- 
actly as  his  monetary  interest  demands. 
Rumor-mongering  seems  to  be  a  part  of  his 
trade.  He  is  the  chief  of  liars.  Perhaps  he  is 
the  exception  rather  than  the  rule  among  his 
fellows — it  is  to  be  hoped  that  he  is — ^but  he 
is  a  pretty  numerous  exception,  for  all  that! 
What  is  the  consequence?  Simply  that  when 
a  financial  storm  threatens  the  country,  the 
Exchange  is  almost  certain  to  be  the  center 


150    ART  OF  WALL  STREET  INVESTING 

of  disturbance.  No  other  institution  is  so  sen- 
sitive. It  exaggerates  all  the  symptoms  o£ 
trouble.  It  sends  out  its  alarming  reports  as 
the  storm-cloud  sends  out  its  lightnings. 
Looking  at  it  as  the  barometer  of  values,  the 
timid  naturally  conclude  that  everything  is 
lost,  and  thus  the  evil  is  unduly  magnified. 
Wall  Street  is  as  much  the  natural  field  for 
panics  as  the  prairie  is  for  tornadoes. 

While  the  Exchange  has  been  of  advantage 
to  the  business  interests  of  the  country,  there 
are  many  who  have  had  dealings  with  it  who 
would  not  testify  in  its  favor.  Of  the  thou- 
sands and  thousands  who  have  visited  it  in 
person  or  by  proxy,  and  done  a  little  business 
with  it,  not  many  are  ready  to  rise  up  and  call 
it  blessed,  except  in  a  qualified  sense.  If  all 
were  to  give  their  experiences,  what  would 
the  verdict  be?  It  is  to  be  apprehended  that 
the  evidence  of  a  very  decided  majority  would 
not  be  flattering  to  Wall  Street's  speculative 
methods;  that  their  testimony  would  be  that 
they  had  found  it  easier  to  lose  money  than  to 
make  it. 

The  man  who  says  he  "never  speculates  in 
stocks,  but  buys  only  what  he  can  pay  for,"  is 
a  sufferer  as  frequently  as  the  man  who  buys 
on  a  "margin."    He  is  generally  a  "sticker" — 


THE  NEW  YORK  STOCK  EXCHANGE  151 

one  who  never  "lets  go."  He  buys  a  security 
that  he  beHeves  in,  and  so  strong  is  his  confi- 
dence that  he  will  not  accept  a  generous  profit 
if  it  is  offered  him,  and  he  is  still  more  tena- 
cious when  a  loss  is  growing.  His  tempera- 
ment will  not  admit  of  the  possibility  of  an 
eventual  loss,  but  the  rule  (with  the  exceptions) 
is  that  he  will  finally  take  his  loss  when  it  has 
reached  its  greatest  proportions.  Securities 
amounting  to  hundreds  of  millions  of  dollars 
have  been  carried  by  people  who  "never  specu- 
late," through  the  depression  of  the  past  four 
years.  They  have  paid  interest  on  money  bor- 
rowed, paid  asssessments  under  re-organiza- 
tion schemes,  and  still  a  loss  stares  them  in  the 
face. 


Wall  Street  Phrases  and  Methods 

IN  the  Wall  Street  field  many  terms  and 
phrases  are  used  which  are  not  familiar 
to  the  outsider  and  therefor  require  definition 
in  a  book  of  this  kind.  In  fact,  many  practical 
Wall  Street  people,  while  clearly  understand- 
ing the  meaning  of  such  and  such  a  phrase  or 
word,  cannot  always  concisely  define  it,  or  con- 
vey its  exact  meaning  to  the  inquirer.  In  the 
follov/ing  pages  the  chief  terms  and  phrases 
relating  to  the  modes  and  general  mechanism 
of  the  Street  are  briefly  defined  and  explained. 
The  various  words  or  phrases  are  taken  up  in 
alphabetical  order. 

Arbitrage.  The  buying  and  selling  of  the 
same  security  in  different  markets,  as  New 
York  and  London,  or  New  York  and  Chicago, 
for  the  purpose  of  making  a  profit  from  the  dif- 
ference in  quotation  between  the  two  markets. 
This  trading  is  of  course  based  on  temporary 
differences    in    prices    between    the    markets, 

153 


154    ART  OF  WALL  STREET  INVESTING 

which  are  due  from  some  special  cause.  If  all 
things  were  equal  every  stock  would,  of  course, 
have  the  same  value  in  every  market  in  which 
it  is  dealt  in.  There  are  two  kinds  of  arbi- 
trage dealings  in  stocks  between  New  York 
and  London.  One  operation  is  known  as  the 
"spread"  and  the  other  the  "back-spread." 

Averaging.  This  is  a  speculative  term  which 
is  used  to  describe  purchases  or  sales  of  stock 
which  are  made  when  the  market  is  rising  or 
falling,  as  the  case  may  be,  for  the  purpose  of 
improving  the  position  of  the  buyer  or  seller 
in  the  matter  of  his  average  price  for  all  his 
securities.  For  instance,  if  loo  shares  are  pur- 
chased at  95  and  the  price  declines  to  75,  the 
averager  will  purchase  another  hundred  shares 
at  75,  thus  bringing  the  average  cost  of  his 
total  holdings  to  85.  Hence,  as  soon  as  the 
price  of  the  stock  recovers  to  over  85  he  will 
have  a  profit  on  his  entire  transactions. 

Bear.  This  is  the  name  for  a  speculator  who 
sells  stock  short  in  expectation  of  buying  it 
back  at  a  lower  price.  In  order  to  do  this  he 
of  course  borrows  a  certificate  to  deliver 
against  his  sale,  and  when  he  has  bought  in  or 
"covered"  he  uses  the  new  bought  certificate 
to  repay  the  loaner. 

Bill  of  Exchange.  This  is  a  written  order  or 
request  from  one  person  to  another  for  pay- 


STREET  PHTRASES  AND  METHODS     155 

ment  to  a  third  party,  the  amount  paid  being 
charged  to  the  one  who  issues  or  signs  the 
bill.  There  is  in  reality  no  difference  between 
a  "bill  of  exchange"  and  an  ordinary  draft,  but 
the  former  term  is  commonly  applied  to  an 
order  for  money  payable  in  a  foreign  country, 
whereas  the  same  sort  of  order  payable  within 
the  country  of  its  origin  is  known  as  a  "draft." 

Blind  Pool.  A  blind  pool  in  the  stock  mar- 
ket is  one  where  the  members  join  together 
and  contribute  capital,  agreeing  that  only  the 
manager  shall  have  full  charge  of  the  pool  and 
know  in  what  way  the  money  is  to  be  used. 
Blind  pools  are  not  confined  to  stocks  but  may 
be  carried  on  in  a  scheme  of  almost  any  nature. 

Bobtail  Pool.  This  is  a  term  which  usually 
applies  to  a  small  or  informal  pool  in  stocks. 
In  such  cases  the  members  join  together  to 
move  the  stock  either  up  or  down  and  then 
each  is  usually  allowed  to  suit  his  own  pleas- 
ure in  closing  out  his  interest  in  the  pool. 

Bucketing.  This  is  a  term  used  to  describe 
sales  made  by  a  broker  for  his  own  account 
and  risk  against  customers'  purchases  or  pur- 
chases by  the  broker  against  customers*  sales. 
It  is  a  reprehensible  practice  and  is  usually 
done  to  enable  the  broker  to  speculate  against 
his  customers*  trades.     In  such  instances  the 


156    ART  OF  WALL  STREET  INVESTING 

broker  wins  if  his  customers  lose,  or  he  loses 
if  his  customers  win. 

Bucket  Shop.  This  is  a  place  usually  adver- 
tised as  a  brokerage  office  where  bets  are  made 
on  regular  stock  exchange  quotations.  No 
actual  transactions  take  place.  Usually  money 
is  put  up  by  the  customer  and  a  commission  is 
charged  for  buying  and  selling  the  same  as  on 
a  regular  exchange.  When  the  quotations 
show  a  profit  to  the  customer,  he  is  privileged 
to  demand  his  profit ;  when  the  limit  of  the  cus- 
tomer's margin  has  been  reached  in  the  price  of 
the  stock,  the  customer  has  lost  his  bet  and  his 
money  and  is  "wiped  out." 

Call.  A  call  on  a  stock  is  a  contract  or 
agreement  binding  the  issuer  to  deliver  to  the 
holder  of  the  call  the  stock  named  therein 
within  a  certain  time,  at  a  certain  price,  if  the 
holder  shall  so  demand.  For  instance,  the  one 
issuing  a  call  will  agree  to  deliver  one  hundred 
shares  of  a  specified  stock  within  thirty  days 
at  no  if  the  purchaser  makes  a  demand  for  it. 
Should  the  stock  be  selling  at  106  the  issuer 
of  the  call  may  be  able  to  sell  his  promise  for 
$100.  The  purchaser  of  the  call  will  then  hold 
the  same,  and  if  the  stock  rises  above  in  with- 
in the  thirty  days  he  will  call  upon  the  issuer 
for  the  hundred  shares  at  no  and  probably  sell 


STREET   PHRASES  AND   METHODS     157 

the  same  in  the  market  at  or  over  iii,  thus 
realizing  a  profit.  A  contract  of  the  same  kind 
applying  to  the  short  side  of  the  market  is 
known  as  a  "put." 

Corner.  A  corner  in  a  stock  is  caused  by 
the  purchase  by  a  pool  or  other  interest  of  all 
the  floating  or  purchasable  stock  of  the  com- 
pany, after  which  the  price  can  be  advanced  at 
the  will  of  those  creating  the  corner.  Specu- 
lators who  are  short  of  the  stock  and  arc  un- 
able to  buy  or  borrow  to  make  delivery  or 
return  stock  which  they  have  borrowed,  are 
thus  forced  into  a  corner  and  "squeezed." 
They  must  settle  with  the  buyers  at  the  buy- 
ers' own  prices. 

Covering.  This  is  a  term  used  in  the  stock 
market  to  describe  the  act  of  buying  stocks  or 
commodities  for  the  purpose  of  closing  short 
contracts,  that  is  to  say,  buying  back  stocks 
previously  sold  but  which  were  not  possessed 
when  sold. 

Due  Bill.  In  stock  exchange  parlance  a 
due  bill  is  a  promise  to  pay  a  dividend  which 
has  been  declared  but  has  not  yet  been  paid 
by  the  company.  For  instance,  a  stock  cer- 
tificate may  be  purchased  in  the  market  after 
the  transfer  books  of  the  corporation  have 
been  closed,  or  the  transfer  of  the  stocks  may 


158    ART  OF  WALL  STREET  INVESTING 

not  have  been  made,  but  by  agreement  the 
dividend  is  to  go  to  the  purchaser,  and  not  to 
the  party  in  whose  name  the  certificate  stands. 
When  the  dividend  is  paid  to  the  original 
party  the  due  bill  is  presented  to  him  and  he 
passes  the  dividend  over  to  the  purchaser. 

Flat.  This  signifies  "without  interest." 
When  bonds  are  sold  flat  no  charge  is  made 
to  the  buyer  for  the  accrued  interest,  as  the 
interest  is  included  in  the  price  of  the  bond. 
On  the  New  York  Stock  Exchange  all  bonds 
are  sold  at  "flat"  prices,  but  in  private  trans- 
actions a  large  majority  of  the  sales  are  made 
on  an  "accrued  interest"  basis.  The  term 
"flat"  is  also  used  in  relation  to  the  lending  of 
stocks.  When  stocks  are  lent  flat  the  lender 
does  not  pay  interest  to  the  borrower  of  this 
stock.  Otherwise  the  borrower  will  pay  the 
lender  the  market  value  of  the  stock  and  the 
lender  will  pay  interest  to  the  borrower  on  his 
money. 

Giving  up.  This  term  is  used  in  the  stock 
markets  to  describe  a  broker  who  executes  an 
order  for  another  broker  and  whose  connec- 
tion with  the  transaction  then  ends.  In  re- 
porting to  the  broker  to  whom  he  sells  or 
from  whom  he  buys  the  name  of  the  broker 
for  whom  he  is  acting,  he  is  said  to  "give  up" 


STREET   PHRASES   AND   METHODS     159 

the  latter.  The  latter  receives  the  stock  and 
completes  the  transaction. 

Hypothecation.  This  signifies  the  pledging 
of  securities  or  other  property  as  collateral  for 
loans.  In  Wall  Street,  where  stocks  are  pur- 
chased on  margin  and  carried  by  a  broker  for 
his  customer,  they  are  usually  hypothecated, 
or  deposited  as  collateral  in  loans  with  banks 
or  trust  companies  or  other  loaners  of  money. 
It  is  in  this  way  that  the  broker  secures  the 
capital  to  carry  the  stocks  for  his  customer. 

Irish  Dividend.  This  is  a  term  sometimes 
used  to  describe  not  a  dividend,  but  an  assess- 
ment on  a  stock. 

Joint  Account.  The  term  for  a  transaction 
in  which  two  or  more  brokers  or  speculators 
join  together  for  their  mutual  benefit  or  risk 
in  the  carrying  through  of  a  transaction. 

Long  of  stocks.  This  is  the  phrase  used 
when  a  speculator  is  a  bull ;  that  is  to  say  when 
his  account  shows  a  balance  of  stocks  on  the 
long  or  bull  side.  The  opposite  condition  is  to 
be  short  of  stocks  and  be  on  the  bear  side. 

Manipulation.  This  word  applies  to  the 
operation  of  working  stocks  both  up  and  down 
on  the  exchanges,  both  ways  at  once.  A  well- 
known  method  of  manipulating  a  stock  is  to 
put  through  on  the  exchange  a  number  of  fie- 


i6o    ART  OF  WALL  STREET  INVESTING 

titious  sales,  one  broker  agreeing  to  purchase 
at  a  certain  price  from  another  and  the  latter 
then  agreeing  to  repurchase  the  same  stock  at 
the  same  or  another  price.  This  arrangement 
is  sometimes  carried  on  between  various  brok- 
ers, each  transaction  being  offset  in  some  way 
by  another.  As  a  result  there  may  be  a  large 
number  of  quotations  reported  with  no  actual 
sales.  These  quotations  are  commonly  known 
as  "wash"  transactions,  and  the  purpose  usu- 
ally is  to  create  outside  interest  in  the  stock 
and  start  a  speculation  in  it  among  genuine 
buyers  and  sellers. 

Margin.  This  is  the  word  used  to  describe 
money  deposited  with  a  broker  for  specula- 
tion in  stocks,  grain  or  other  commodities.  In 
stocks  the  margin  required  ranges  from  5%  to 
30%,  dependent  upon  the  character  of  the 
security  purchased.  The  average  margin  is 
10%,  which  amounts  to  $1,000  on  the  ordinary 
one  hundred  shares  of  stock.  The  margin  pro- 
tects the  customer  down  to  a  price  ten  points 
below  the  price  he  has  paid,  if  he  is  long  of 
stock,  and  ten  points  above  the  price  he  has 
received  if  he  is  short  of  the  stock.  As  his 
margin  becomes  narrower  because  of  the 
change  in  the  market  prices  he  is  required  to 
put  up  more  money  or  else  have  his  account 
closed  out. 


Street  phrases  and  methods    i6i 

Outside  broker.  This  term  describes  a 
broker  who  is  not  a  member  of  the  regular 
exchange,  but  who  deals  in  securities  either  on 
the  streets  or  elsewhere.  In  New  York  City 
an  outside  broker  is  one  who  deals  in  what  is 
known  as  the  outside  market  or  on  the  curb. 
There  are  nowadays  a  very  large  number  of 
stocks  and  bonds  which  are  traded  in  in  this 
outside  market,  and  these  outside  brokers  usu- 
ally conduct  just  as  legitimate  a  business  as 
those  who  make  trades  on  the  stock  exchange. 

Passing  a  dividend.  This  does  not  mean 
declaring  a  dividend,  as  many  people  assume, 
but  it  means  failure  to  declare  a  dividend  that 
had  previously  been  regularly  paid.  When  the 
company  specifically  states  that  it  will  not  pay 
a  similar  dividend  to  that  which  previously 
had  been  paid,  then  it  is  said  that  the  dividend 
is  stopped.  But  when  no  official  action  is  taken 
and  the  dividend  simply  is  not  declared  by  the 
directors,  it  is  said  to  have  been  "passed.'* 

Privilege.  This  is  a  general  name  for  a  call, 
a  put,  a  spread  or  a  straddle,  information  as  to 
each  of  these  terms  being  supplied  under  their 
own  headings.  In  any  kind  of  a  privilege  the 
purchaser  of  the  same  is  not  liable  for  loss  be- 
yond the  amount  actually  paid  for  it. 

Put.  A  put  on  a  stock  is  the  reverse  of  a 
call,   being  a  written  contract   or  agreement 


i62    ART  OF  WALL  STREET  INVESTING 

binding  the  issuer  to  receive  from  the  holder 
the  stock  named  in  the  agreement  within  a 
certain  time  at  a  certain  price  if  the  holder 
shall  so  demand.  The  act  of  delivering  such 
stock  to  the  issuer  of  the  contract  is  generally 
known  as  "putting"  the  stock. 

Pyramiding.  This  describes  operations  by 
the  use  of  paper  profits  made  in  transactions 
not  yet  closed  and,  therefor,  not  yet  in  hand. 
For  instance,  one  may  purchase  one  hundred 
shares  of  stock  at  50  on  a  margin  of  10%  of  the 
par  value.  If  the  stock  advances  to  60  the  pur- 
chaser will  then  have  20%  margin  and  he  will 
purchase  one  hundred  shares  more.  If  the 
price  then  goes  to  70  he  will  purchase  two  hun- 
dred shares  more,  giving  him  four  hundred  in 
all.  If  it  next  goes  to  80  he  will  then  purchase 
four  hundred  shares  more,  giving  him  eight 
hundred  shares  in  all,  on  which  he  has  a  mar- 
gin of  10%,  or  $8,000.  Up  to  this  point  his 
paper  profits  will  be  $7,000.  If  the  market  con- 
tinues in  its  rise  he  will  continue  accumulating 
stock,  until  his  account  shows  very  large  ac- 
cumulated paper  profits.  If  he  then  sells  out 
he  will  have  turned  his  profits  into  cash,  but 
if  the  market  suddenly  drops  ten  points  he  will 
not  only  have  lost  the  profit  on  the  last  trans- 
action, but  will  have  lost  everything.    In  other 


STREET  PHRASES   AND   METHODS     163 

words,  the  inverted  pyramid  will  have  fallen 
and  ruined  him  in  the  crash. 

Spread.  A  spread  is  a  put  and  call  combined 
and  is  practically  the  same  as  a  straddle.  If 
the  stock  goes  below  the  price  named  in  the 
put  end,  plus  the  cost  of  the  spread,  the  holder 
makes  a  profit ;  also  if  the  stock  goes  above  the 
price  named  in  the  call  end,  plus  the  cost  of 
the  spread,  the  holder  of  the  spread  also  profits. 
In  other  words,  the  purchaser  of  a  spread  is 
said  to  "play  the  two  ends  against  the  middle" ; 
he  has  two  chances  to  make  money  and  his 
loss  in  any  case  is  limited  to  the  cost  of  the 
spread. 

Straddle.  A  straddle  is  similar  to  a  spread 
with  the  exception  that  only  one  price  is  named 
in  it.  The  stock  may  be  called  for  or  delivered 
at  this  one  price  only.  As  in  the  other  cases, 
the  stock  must  go  up  or  down  more  than  the 
amount  paid  for  the  straddle  before  there  is  a 
profit  in  it. 

Under  the  rule.  This  is  a  term  used  to 
describe  an  official  transaction  made  on  the 
New  York  Stock  Exchange.  In  case  a  mem- 
ber of  the  Exchange  fails  to  receive  or  deliver 
stock  in  accordance  with  his  contract  of  pur- 
chase or  sale,  the  stock  in  question  is  bought 
or  sold,  as  the  case  may  be,  by  the  chairman  of 


i64    ART  OF  WALL  STREET  INVESTING 

the  Exchange  for  the  account  of  the  delin- 
quent member,  and  any  difference  in  cost  is 
charged  or  credited  to  him.  When  transac- 
tions of  this  kind  are  put  through  they  are 
known  as  purchases  or  sales  made  "under  the 
rule." 

Washing.  This  term  describes  the  operation 
of  simultaneous  buying  and  selling  the  same 
stocks  for  the  purpose  of  making  quotations 
and  inducing  outside  speculation  or  interest  in 
the  stock  by  imparting  apparent  activity  to  it. 
Washing  is  usually  employed  when  manipula- 
tion of  some  kind  is  in  progress. 

Watered  stock.  A  term  used  to  describe  the 
capital  stock  of  a  company  which  is  not  sup- 
posed to  be  represented  with  a  corresponding 
amount  of  assets.  The  term  as  used  is  a  vague 
one  and  is  subject  to  several  interpretations. 
For  instance,  when  a  stock  dividend  is  de- 
clared the  original  stock  is  said  to  be  watered 
to  that  extent,  unless  the  newly  issued  stock 
represents  added  property  or  value  in  some 
form. 

Ex-dividend.  When  a  stock  upon  which  a 
dividend  has  been  declared  is  sold  and  the 
price  is  not  to  include  the  amount  of  the  divi- 
dend to  be  shortly  paid,  the  stock  is  said  to  be 
sold  "ex-dividend." 


STREET   PHRASES  AND   METHODS    165 

In  Wall  Street  no  one  is  always  right ;  cheap 
advice  is  plentiful;  some  men  learn  only  by 
failing;  losses  make  us  more  cautious;  inter- 
rogate before  you  negotiate;  money  is  most 
valued  when  lost;  don*t  buy  an  egg  until  it  is 
laid ;  fraud  is  built  on  misrepresentation ;  spec- 
ulation begins  when  certainty  ends;  oppor- 
tunity is  often  lost  by  deliberating;  get  infor- 
mation before  you  invest,  not  after;  get  an 
investment  that  will  let  you  sleep ;  it  is  idle  to 
wait  for  your  ship  to  come  in  unless  you  have 
sent  one  out;  those  who  lament  their  mis- 
fortunes are  generally  they  who  do  not  recog- 
nize their  opportunities;  buyers  of  stock  be- 
long to  two  classes:  those  who  trade  on  ten- 
dencies and  who  take  hold  wherever  the  mar- 
ket is  active  without  much  reference  to  values 
or  prices,  and  those  who  always  try  to  buy 
when  prices  are  down  instead  of  when  they  are 
up. 

In  Wall  Street  the  investor  determines  the 
prices  of  stocks  in  the  long  run.  This  state- 
ment is  sometimes  disputed  by  those  who 
point  to  the  fluctuations  which  are  confessedly 
made  by  manipulators  without  regard  to  value. 
It  is  true  that  such  fluctuations  do  occur,  but 
when  the  manipulation  is  over  the  influence  of 
the  investor  is  again  felt.   If  he  decides  that  a 


i66    ART  OP  WALL  STREET  INVESTING 

given  stock  is  worth  only  so  much  the  manipu- 
lator will  ultimately  be  compelled  to  accept 
that  valuation,  because  manipulation  cannot  be 
kept  up.  The  general  object  of  manipulation 
is  to  buy  below  value  and  sell  above  value. 

"An  important  influence  of  the  stock  ex- 
changes, and  in  some  ways  also  of  the  produce 
exchanges,  is  the  influence  they  exert  upon  the 
money  market.  The  possession  by  any  coun- 
try of  a  large  mass  of  salable  securities  affords 
a  powerful  guarantee  against  the  affects  of  a 
severe  money  panic.  If  in  New  York  there 
arises  a  sudden  pressure  of  money,  so  that  con- 
fidence becomes  impaired  and  people  having 
contracts  entitling  to  future  or  immediate  de- 
livery of  money  insist  that  these  contracts 
shall  be  executed  in  money  instead  of  other 
forms  of  promises,  what  happens?  The  banks 
call  in  loans  and  begin  to  hold  their  cash.  If 
they  hold  large  quantities  of  securities  salable 
on  the  London,  Paris  or  Berlin  market  a  cable 
order  will  affect  the  sale  of  these  in  an  hour, 
and  the  gold  proceeds  will  be  on  their  way 
across  the  Atlantic  in  a  day. 

"Wonderful  has  been  the  effect  within  the 
last  twenty-five  years  of  this  steady  influence 
of  .the  stock  market  upon  the  demand  for 
money  and  upon  the  smoothness  of  the  opera- 


STREET   PHRASES  AND   METHODS     167 

tions  of  the  mechanism  of  the  exchanges. 
What  has  just  been  put  in  a  crude  form  by 
referring  to  a  crises  occurs  daily  and  hourly  on 
the  stock  exchanges,  and  prevents  sudden  con- 
traction and  expansion  in  the  rate  for  loans. 
The  manufacturer  goes  placidly  on  paying  his 
four  or  five  per  cent,  for  commercial  loans, 
when  if  there  were  no  stock  exchanges  where 
securities  could  be  sold  in  one  market  at  a 
slight  profit  over  another,  he  would  find  that 
his  bank  was  first  charging  seven  or  eight  per 
cent.,  then  dropping  to  three  or  four  and  then 
going  back  to  eight.  By  means  of  the  facilities 
which  the  stock  market  affords  for  placing 
credit  instantly  at  the  command  of  one  market 
or  another  the  pressure  for  money  is  miti- 
gated, and  has  put  a  limited  effect  upon  the 
commercial  borrower.  Such  pressure  as  now 
occurs  is  transferred  to  the  borrower  on  call 
— the  broker  in  stocks,  who  thus  acts  as  in- 
surer for  the  commercial  borrower.  This  in- 
fluence of  the  stock  market  has  much  the  effect 
of  a  buffer  upon  the  impact  of  two  solid 
bodies.  Crises  are  prevented  when  they  can 
be  prevented,  and  when  they  cannot  they  are 
anticipated,  and  their  force  is  broken  into  a 
mild  succession  of  ripples  instead  of  a  tidal 
wave."— Chas.  A.  Conant,  "Wall  Street  and 
the  Country." 


'-A  man's  learning  dies  with  him; 
even  his  virtues  fade  out  of  remem- 
brance; uut  the  dividends  on  the 
stocks  he  bequeaths  to  his  children 
live  and  keep  his  memory  green." 
— Holmes. 


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INDEX 


Page 

Analyzing  Railroad  securities 75 

Arbitrage,  definition  of 153 

Arkansas  Central  Ry 16 

Assumed  bond 43 

Averaging,  defined 154 

Bear,   defined 154 

Bill  of  Exchange,  defined 154 

Blind  pool,  defined 155 

Bob  tail  pool,  defined 155 

Bonds  and  what  they  represent 33 

Bucketing,  defined 155 

Bucket  shop,  defined 156 

Call,  defined 156 

Capital    assets 91 

Capital    liabilities 94 

Carnegie,    Andrew 32 

Centralia  &  Chester  R.  R 10 

Collateral  trust  bond 39 

Common   stock 60 

Conant,  Chas.  A.,  quoted 146,  166 

Consolidated  mortgage  bond 36 

Construction   account 91 

Convertible  bond 40 

Corner,  defined 157 

Covering,  defined 157 

Cumulative    stock 64,  74 

Currency    bond 55 

Current  assets 93 

Current    liabilities 95 

Debenture   bond 38 

Debenture  stock 66 

Delaware,  Lackawanna  &  Western  Ry 67 

Divisional    bond 44 

Due   bill,   defined 157 

Earning  power  of  railroads 84 


178  INDEX 

Page 

Equipment  bond 54 

Equipment  statistics 83 

Ex  dividend,  definition  of 164 

Extended  bond 50 

Financial    characteristics 90 

Financing    industrials 70 

First  mortgage  bond 33 

Fixed  charges 88 

Flat,  definition  of 158 

Franchises 100 

Get-Rich-Quick  schemes m 

General  mortgage  bond 37 

Giving  up,  definition  of 158 

Guaranteed   bond 4^ 

Guaranteed  egg  swindle 112 

Hypothecation,  defined i59 

Income  bond 45 

Investment  versus  speculation 105 

Irish   dividend i59 

Joint  account,  defined i59 

Joint   bond 4© 

Judging  railroad  stocks 67 

Long  of  stocks,  definition  of i59 

Manipulation,  defined i59 

Margin,    defined 161 

Mining  sharpers 116 

New  York  Stock  Exchange,  described i35 

Non-cumulative  stock 64 

Operating  expenses 86 

Outside  broker,  definition  of 161 

Participating  bond 53 

Passing  a  dividend 161 

Physical  characteristics  of  railroads 77 

Preferred  stock 63 

Prior  lien  bond 38 

Privilege,  defined 161 

Public  Service  Corporation  of  New  Jersey loi 

Put,   defined 161 

Pyramiding,    defined 162 

Reading  Company  4s 10 

Refunding   bonds 5^ 

Reorganizations  and  syndicates 125 

Rock  Island  Co 58 

Safety  &  Security 9 


INDEX  179 

Page 

Sea  water  gold  swindle 113 

Second  mortgage  bond 34 

Sinking  fund  bond 47 

Spread,   defined 163 

Stocks  and  what  they  are 59 

Straddle,    defined 163 

Ten  dollar  investors 118 

Third  mortgage  bond 35 

Tractions  and  industrials 99 

Train   mileage 82 

Underlying   bond 51 

Under  the  rule,  definition  of 163 

Unearned  increment loi 

United  States  Steel  Corporation 102 

Washing,   defined 164 

Watered  stock,  defined 164 

Woodlock,  Thos.  F.,  quoted 75 


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